Moody' s  Magazine 

sr^ss 

ublication  de- 


Moody's  Magazine 

THE  NATIONAL  INVESTORS'  MONTHLY 

investor  in  securities.  In  its  pages  are  discussed,  monthly,  the  fundamental 
causes  of  market  movements  and  the  principles  of  safe  investment.  It  does 
not  disseminate  tips  nor  does  it  encourage  speculation  in  the  ordinary  sense  of 
that  word.  Its  aim  is  to  safeguard  the  investor  and  to  teach  him  to  think  for 
himself.  Moody  s  Magazine  contains,  every  month: 

An  editorial  review  of  current  events  in  which  a  careful,  unbiased  and  inter- 
esting analysis  of  current  investment  and  general  conditions  is  made  in  such  a 
way  that  the  average  man  is  always  able  to  comprehend  them. 

Special  articles  of  well-known  financial  experts  and  economists  on  such  topics 
as  the  Tariff,  the  Currency,  Railroad  Rate  Regulation,  Gold  Depreciation, 
questions  which  vitally  affect  the  securities  markets. 

Educational  articles  on  the  various  phases  of  bonds,  stocks,  mortgages  and 
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jects interesting  to  the  investor. 

Regular  departments  covering  life  insurance,  public  accounting,  legal 
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MOODY'S  MAGAZINE 
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NOTICE  TO  READERS 

READERS  of  the  Book  may  arrange  with  Roger 
W.  Babson,  Wellesley  Hills,  Mass.,to  be  sup- 
plied each  week  with  the  latest  figures  on  Railroad 
Earnings,  Foreign  Commerce,  Crops,  Domestic 
Trade,  Political  Conditions,  Money  Supply,  Gold 
Movements,  and  eighteen  other  subjects  of  vital 
interest  to  investors.  Only  by  receiving  these  figures 
regularly  and  systematically,  tabulated  in  form  for 
practical  use,  can  the  great  principles  herein  outlined 
by  Mr.  Hall  be  of  direct  and  immediate  profit. 


Office  o( 

HENRY  HALL, 

Author  of 

"How  Money  is  Made  in  Security  Investments" 

52  BROADWAY, 

New  York. 


\\  7HILE  books  like  "  HOW  MONEY  IS  MADE  IN  SECURITY 

YY       INVESTMENTS"  have  done  much  toward  educating  the 

public  with  regard  to  the  proper  times  and  seasons  when 

to  buy  and  when  to  sell  stocks,  yet  an  extensive  correspondence  shows 

the  awful  mistakes  which  are  being  constantly  made  by  people  in 

private  life  in  buying  securities  at  the  wrong  time  or  buying  the  wrong 

things  or  both. 

The  author  is  constantly  in  receipt  of  inquiries  from  those  who 
have  done  him  the  honor  to  buy  his  book,  concerning  (1)  slocks  and 
bonds  in  which  they  have  invested ;  (2)  other  securities,  which  would 
ensure  safety  of  principal  and  afford  the  best  chances  of  appreciation 
in  value;  and  (3)  the  author's  opinion  of  the  stock  market  at  the 
time  being,  and  whether  it  is  best  either  to  buy  or  sell  in  order  to 
take  advantage  of  the  great  swings  in  prices  as  outlined  in  the  book. 

So  great  has  become  the  number  of  these  inquiries,  and  so  large 
have  been  the  profits  of  men  who  have  followed  the  author's  advice, 
that  it  now  seems  proper  to  make  a  moderate  charge  for  the  author's 
services  in  these  matters. 

For  $10  the  undersigned  agrees  to  make  a  careful  report  upon  the 
holdings  of  stocks  or  bonds  of  any  individual  or  institution,  pointing 
out  those  which  should  be  held  for  coming  appreciation  in  value  and 
those  which  ought  to  be  sold,  either  because  they  are  too  high  or  for 
other  reasons;  and,  further,  to  make  suggestions  concerning  other 
stocks  and  bonds  which  can  safely  be  bought  both  for  income  and 
for  large  profits.  In  addition,  the  trend  and  present  position  of  the 
financial  markets  will  be  explained. 

Correspondence  is  invited.  Send  me  a  list  of  the  securities  you 
are  carrying,  for  my  criticisms  and  comments. 

HENRY  HALL. 


MACKAY  &  CO. 

Members,  New  York  and  Boston  Stock 
Exchanges.  Dealers  in  Government  Bonds 
and  other  Investment  Securities.  Interest 
allowed  on  deposits  :  :  :  :  : 

NASSAU  AND  PINE  STREETS,  NEW  YORK 

13  Congress  St.  421  Chestnut  St. 

Boston  Philadelphia 

Rookery  Building, 
Chicago 


HOW  MONEY  IS  MADE  IN 
SECURITY  INVESTMENTS 

OR 

A  FORTUNE  AT  FIFTY-FIVE 


BY 

HENRY  HALL 

FOURTH  EDITION 


52  BROADWAY 

NEW  YORK 

1909 


Copyright,  1909,  by 
HENRY  HALL 


THE   DEVINNE   PRESS 


CONTENTS 

PAGE 

A  NATION  OF  INVESTORS 3 

How  AN  INVESTOR  MAKES  MONEY 11 

BATE  OP  INTEREST  ON  INVESTMENTS 21 

BONDS 28 

STOCKS 44 

CYCLES  OF  PROSPERITY  AND  DEPRESSION  .......  55 

NORMAL  YEARLY  MOVEMENTS  OF  PRICES 105 

COURSE  OF  THE  STOCK  MARKET  SINCE  1860 ,114 

POINTS  TO  BE  WATCHED 119 

TURNING  POINTS  IN  THE  MARKET 139 

DULL  DAYS  IN  STOCKS 154 

WHEN  TO  BUY  SECURITIES 160 

WHEN  TO  SELL  SECURITIES 169 

MAXIMS  OF  WALL  STREET 177 

FINANCIAL  TERMS  AND  PHRASES 182 

RANGE  OF  LEADING  STOCKS  SINCE  1890 193 

INTEREST  BATES  AND  SURPLUS  DEPOSITS  SINCE  1890     .    .  210 

INDEX  .  231 


PREFATORY  EXPLANATION 

A  NUMBER  of  text  books  have  been  written  to  explain  the 
character  of  the  securities,  which  are  sold  through  the 
banking  and  brokerage  houses  of  the  United  States.  They 
treat  of  stocks,  bonds,  notes  and  mortgages  and  describe 
the  peculiarities  of  each.  Other  books  have  been  published 
to  define  the  meaning  of  the  technical  terms  in  vogue  in 
the  financial  world.  They  all  serve  a  useful  purpose. 

It  seems  to  the  writer,  however,  that  there  is  imperative 
need  of  another  work,  which  shall  go  beyond  elementary 
facts,  and,  in  the  matter  of  advice,  shall  do  more  than 
dwell  upon  the  simple  truism  that  an  investor,  before  all 
other  things,  should  pay  attention  to  the  safety  of  his 
capital  and  the  regularity  of  his  income.  An  investor 
needs  to  know  how  he  can  actually  accomplish  those  ob- 
jects, and  farther,  not  only  how  he  can  avoid  the  loss  of 
part  or  all  of  his  money,  but  also  how  to  make  money  in 
securities.  This  book  is  devoted  to  the  broad  principle, 
that,  unless  there  is  a  fair  assurance  that  money  can  be 
made  on  stocks  and  bonds,  it  is  almost  certain  that  money 
will  be  lost  on  them  or  so  locked  up  as  not  to  be  available 
for  other  uses  for  a  period  of  years.  If  securities  are 
going  no  higher,  if  the  times  do  not  promise  greater  profits 
and  larger  dividends,  then  all  classes  of  securities  are  go- 
ing lower,  at  a  date  not  far  distant. 

A  vast  amount  of  money  is  either  badly  employed  or 
wasted,  every  year,  by  investors,  and  great  opportunities 


viii  PREFATORY  EXPLANATION 

are  lost,  in  consequence  of  inattention  to  cautionary  sig- 
nals, which  are  easily  recognized  by  men  experienced  in 
finance  but  are  entirely  overlooked  by  others. 

Coming  danger  and  coming  prosperity  are  always  fore- 
shadowed in  various  ways.  An  investor  sometimes  buys 
stocks  or  bonds,  when  it  is  of  dominating  importance  that 
he  should  sell  everything  he  has,  both  with  a  view  to 
harvest  the  profit  he  has  on  them  and  to  reinvest  later — 
selling  in  times  of  bullish  enthusiasm  being  the  step  the 
average  investor  is  usually  the  most  reluctant  to  take. 
Conversely,  an  investor  only  too  often  sells,  when  every 
financial  consideration  demands  that  he  should  buy.  To 
guide  him  in  buying  and  selling,  and  to  urge  him  to  take 
his  profits  on  investments  at  certain  critical  periods,  are 
the  objects  of  this  book. 

History  repeats  itself  in  Wall  Street  with  unfailing 
regularity,  as  in  all  other  fields  of  human  activity.  A 
diligent  study  of  Wall  Street  methods  and  the  financial 
history  of  the  past  fifty  years  will  reveal  to  any  intelligent 
man  considerations  of  great  importance;  and  the,  fruits 
of  such  a  study  are  here  laid  before  the  public  in  the  belief 
that  they  will  conserve  the  interests  of  actual  investors. 
Attention  will  be  called  especially  to  the  remarkable 
changes  in  prices  of  all  securities,  brought  about  by  alter- 
nating periods  of  prosperity  and  depression,  and  to  the 
smaller  but  also  noteworthy  fluctuations  at  certain  sea- 
sons in  each  year,  all  of  which  will  be  utilized  by  a  care- 
ful investor. 

It  may  be  well  to  say  that  this  book  is  not  written  for 
the  information  of  men  of  large  fortunes.  The  man  of 
millions  needs  no  guidance  from  a  work  of  this  sort.  He 
has  private  information  not  at  all  at  the  service  of  the 


PREFATORY  EXPLANATION  ix 

generality,  and  he  can  proceed  with  the  purchase  and  sale 
of  securities,  with  a  confidence  which  is  denied  to  men 
less  well  informed.  The  subject  of  security  investments, 
and  how  to  make  money  in  them,  is  here  discussed  to  meet 
the  requirements  of  many  thousand  Americans,  who  have 
moderate  amounts  of  money,  say  from  $500  to  $5,000, 
which  they  desire  to  add  to  their  permanent  capital,  and 
from  which  they  wish  to  derive  as  large  a  revenue  as  is 
consistent  with  safety,  and  from  the  investment  of  which 
they  can  also  gain  an  actual  increment  to  their  principal. 
This  work  will  not  encourage  the  belief  that  a  man  can 
make  himself  rapidly  rich  by  trading  in  Wall  Street  with 
a  few  thousand  dollars  of  capital.  The  achievement  is 
possible  to  men  who  have  been  trained  to  the  business, 
but  it  is  foreign  to  the  purpose  in  view.  The  object  will 
be  to  show  that  security  investments  can  be  handled  in 
such  a  shrewd  and  conservative  manner,  that  the  princi- 
pal will  be  safe  and  the  income  sure,  and  that  when  this  is 
accomplished,  a  desirable  increment  can  be  added  to  prin- 
cipal in  a  perfectly  legitimate  way— a  policy  which  will 
ensure  a  fortune  possibly  in  a  series  of  years  and  certainly, 
in  a  life-time. 


NEW  YORK,  April  29,  1909. 

IN  presenting  the  fourth  edition  of  this  book  to  the  public, 
the  author  calls  attention  to  the  remarkable  fact  that  a 
large  proportion  of  the  business  world  appears  to  have 
been  taken  entirely  by  surprise  by  the  panic  in  stocks  and 
recession  in  business  of  1907. 

It  is  alleged  that  thousands  of  active  business  men  lost, 
in  one  year,  the  profits  of  the  previous  ten,  and  virtually 
were  forced  to  begin  life  anew. 


x  PREFATORY  EXPLANATION 

The  aftermath  of  a  panic  is  practically  the  same  in  all 
cases.  The  losses  are  always  grievous.  The  poor  suffer 
to  some  extent;  the  rich  suffer  the  most.  That  was  cer- 
tainly the  case,  in  1907,  when  the  securities  listed  on  the 
New  York  Stock  Exchange  fell  more  than  $4,000,000,000 
in  value.  While  the  panic  of  1907  resembled  1893  in  some 
respects,  1896  in  others,  and  1903  in  yet  others,  the  general 
result  has  been  the  same  so  far  as  wide-spread  losses  to 
prosperous  individuals  is  concerned. 

But  it  is  remarkable  that  intelligent  and  well  read  men, 
attentive  to  the  conditions  on  which  prosperity  -and  sol- 
vency rest,  should  have  been  taken  by  surprise  by  the 
panic  of  1907.  As  early  as  December,  1906,  the  signs  of 
a  coming  crisis  were  unmistakable.  The  enormous  excess 
of  loans  over  deposits  in  New  York,  almost  unprece- 
dented in  history,  a  condition  paralleled  to  some  extent  in 
the  country  banks,  was  alone  sufficient  to  foreshadow  the 
course  of  events  in  1907.  The  panic  was,  in  fact,  predicted 
by  the  author  in  correspondence  with  authorities  in  Wash- 
ington, as  early  as  January,  1907. 

This  volume  was  perhaps  the  first  to  point  out  the  vital 
influence  of  an  excess  of  loans  over  deposits  upon  the 
course  of  the  stock  market.  The  events  of  1907  have  vin- 
dicated its  position  on  this  subject. 

The  rebound  in  stocks  and  bonds  from  the  low  level 
of  the  Fall  of  1907  has  been  vigorous,  as  is  usual  in  the 
second  year  after  a  panic;  and  various  good  stocks  have, 
in  1909,  reached  the  highest  prices  at  which  they  have 
ever  been  sold.  The  immediate  future  now  rests  upon  the 
action  of  Congress  in  revising  the  tariff,  the  decision  of 
the  United  States  Supreme  Court  on  the  "commodity 
clause"  suit,  and  the  currency  legislation  of  the  present 
Congress. 


HOW  MONEY  IS  MADE 


HOW  MONEY  IS  MADE 


A  NATION  OF  INVESTORS 

OLD  TIMES  IN  AMERICA,  COMPARED  WITH  THE  PRESENT.—  AMERICAN 
SECURITIES  ONCE  OWNED  MAINLY  ABROAD.— THE   CHANGE  SINCE   1825 

PEOPLE  were  strong,  healthy  and  happy  in  the 
' l  good  old  times ' '  of  the  forefathers  of  the  republic, 
but  they  were  not  rich.  The  skies  were  as  blue  as  now, 
the  grass  as  green,  the  streams  were  full  of  fish  and  the 
forests  of  game,  the  soil  was  fertile,  and  it  was  not  difficult 
to  make  a  living;  but  scarcely  any  one  owned  securities 
and  the  commonalty  knew  little  about  them. 

Several  millions  of  people  occupied  the  thirteen  colo- 
nies. They  were  courageous,  industrious  and  thrifty. 
But  in  the  simple  occupations  of  the  pioneer  settlers  of 
a  new  continent,  no  great  amount  of  surplus  wealth  could 
be  accumulated.  Lands  and  plantations,  stage  coaches, 
toll  roads,  sailing  vessels,  petty  manufactures  for  local 
sale,  retail  and  auction  stores  and  inns  all  existed  and 
were  the  forerunners  of  lines  of  business,  in  which  for- 
tunes have  since  been  made.  At  the  time,  they  merely 
afforded  a  subsistence  to  the  energetic  men,  who  devoted 
their  lives  to  them.  Millionaires  were  almost  unknown, 
while  men  worth  several  hundred  thousand  were  extremely 
rare.  General  Washington  was  probably  the  only  man  on 
this  continent  in  his  day,  who  could  have  been  rated  as 
a  millionaire. 

3 


:  MONEY  is  MADE 

Securities  were  not  unknown  of  course ;  but  there  were 
only  a  few  joint  stock  companies  and  almost  no  corpora- 
tions 7  and  from  the  very  nature  of  the  case,  stocks  and 
bonds  had  little  more  than  an  academic  interest  to  per- 
sons who  had  no  money  with  which  to  buy  them.  Owners 
of  securities  were  found  only  among  a  limited  number  of 
merchants  and  bankers  in  the  larger  cities  and  the  pro- 
prietors of  landed  estates,  North  and  South. 

Stocks  and  bonds  came  into  vogue,  gradually,  after  the 
War  for  Independence,  as  wealth  increased  and  the  trade 
and  natural  resources  of  the  country  were  developed. 
Before  many  years  had  passed,  the  necessity  had  arisen 
for  enterprises,  which  could  be  set  on  foot  only  through 
the  aid  of  the  united  funds  of  many  different  persons  or 
the  resources  of  the  State.  Bonds  were  issued  by  the 
public  authorities  for  the  payment  of  debts  to  the  soldiers 
and  others  and  for  the  construction  of  roads.  New  ven- 
tures outside  of  the  province  of  Government  were  carried 
out  by  organizing  joint  stock  companies  and  corporations ; 
and  as  foreign  trade  had  brought  a  great  deal  of  money 
into  the  country,  it  was  possible  to  secure  the  capital  for 
the  early  modest  enterprises  mainly  through  leading  men 
of  the  different  localities,  who  took  the  stocks  and  bonds 
of  new  companies,  largely  from  motives  of  public  spirit 
and  not  because  they  were  seeking  desirable  forms  of  in- 
vestment for  surplus  funds.  The  first  great  stock  com- 
pany came  into  being  in  1791,  when  Congress  chartered 
the  original  United  States  Bank.  Local  banks  were 
formed  in  the  leading  cities,  followed  later  by  fire  and 
marine  insurance  companies.  During  the  twenty  years 
next  after  Independence,  Americans  had  become  familiar 
with  the  idea  of  devoting  a  part  of  their  surplus  capital 
to  the  purchase  of  securities. 


A  NATION  OF  INVESTORS  5 

For  many  years,  however,  it  was  practically  impossible 
to  float  large  issues  of  securities  in  the  United  States. 
The  projectors  of  every  important  enterprise  looked  to 
Europe  for  a  considerable  part  of  the  funds  required. 
One  of  the  interesting  items  of  news  in  "Niles's  Register " 
and  other  public  prints,  a  century  ago,  was  the  quotations 
of  American  bank  shares  and  State  bonds  in  London, 
printed  here  about  a  month  late  as  a  rule. 

An  illustration  of  the  inability  of  rich  Americans,  a 
century  ago,  to  absorb  a  large  issue  of  even  the  most  gilt 
edged  security  is  "afforded  by  the  experience  of  the  first 
United  States  Bank,  an  institution  of  which  the  country 
was  extremely  proud.  Measured  by  the  times,  the  bank 
was  a  gigantic  concern.  It  had  a  capital  of  $10,000,000, 
of  which  the  Government  took  $2,000,000,  the  public 
$8,000,000.  In  modern  times,  it  is  on  record  that  one  man 
has  supplied  $8,000,000  for  a  single  enterprise. ,  In  1791, 
the  sum  was  too  large  for  the  whole  of  the  infant  republic. 
While  it  is  true,  as  reported  by  President  Washington, 
that  the  entire  capital  stock  of  the  Bank  was  subscribed 
for  in  one  day,  the  fact  remains  that  those  who  thus  be- 
came partners  in  the  Bank  took  the  stock  in  most  cases 
as  a  speculation,  not  as  an  investment;  and,  as  was  ex- 
pected, the  bulk  of  it  speedily  found  its  way  abroad.  In 
1809,  after  the  Government  had  sold  its  interest  in  the 
Bank,  an  official  report  stated  the  rather  surprising  fact 
that  only  7,000  shares  (of  $400  each)  were  owned  by  Amer- 
icans. The  remaining  18,000  shares  were  held  in  Europe, 
mostly  in  London. 

How  little  the  ownership  of  securities  interested  our 
people  in  the  early  days  is  farther  shown  by  the  entire 
absence  of  special  facilities  for  dealing  in  them.  Bonds 
and  stocks  were  bought  and  sold  principally  at  the  stores 


6  HOW  MONEY  IS  MADE 

of  leading  merchants  and  auctioneers.  Not  until  1792, 
a  year  after  the  organization  of  the  United  States  Bank, 
were  steps  taken  which  tended  toward  the  creation 
of  a  specific  market-place  for  securities.  In  that  year,  a 
start  was  made  in  New  York,  by  an  agreement  between  a 
few  jobbers  of  stocks  and  bonds  as  to  rates  of  commission. 
This  was  the  germ  of  the  New  York  Stock  Exchange.  In 
later  years,  dealers  in  securities  in  other  cities  started 
stock  exchanges  of  their  own. 

After  the  dawn  of  railroad  construction  in  1826,  invest- 
ment in  stocks  and  bonds  began  to  play  a  distinct  part  in 
financial  affairs.  Wealth  had  continued  to  accumulate; 
and  many  persons  were  found  in  the  cities,  who  had  man- 
aged to  save,  through  frugality  and  their  talents  as  busi- 
ness men,  dollar  by  dollar,  sums  of  money  not  required 
in  the  prosecution  of  private  business.  This  class  of 
persons  became  considerable  buyers  of  the  securities  of 
the  pioneer  railroad  lines  and  public  utility  corporations, 
which  sprang  up  in  the  '30s  and  '40s.  Some  of  these  in- 
vestments were  profitable,  with  the  consequence  that  men 
of  means  turned  more  and  more  in  the  direction  of  cor- 
porate securities  as  a  proper  and  safe  employment  of  sur- 
plus capital.  Each  decade  of  progress  added  to  the  vol- 
ume of  stocks  and  bonds  afloat  and  the  number  of  buyers 
of  them.  The  process  was  a  gradual  one,  however,  and 
more  than  one  generation  of  active  business  men  had 
crossed  the  stage  of  affairs  and  disappeared,  before  there 
was  any  striking  increase  in  the  transactions  in  securities 
or  the  roll  of  stockholders  in  corporations. 

From  Edmund  C.  Stedman's  "  History  of  the  New 
York  Stock  Exchange"  it  appears  that  in  1827,  trading  at 
New  York  was  confined  to  forty-two  descriptions  of  secur- 
ity issues,  as  follows: 


A  NATION  OF  INVESTORS  7 

Twelve  bank  stocks. 

Eight  public  bonds. 

Nineteen  fire  and  marine  insurance  companies. 

Delaware  &  Hudson  Canal  stock. 

New  York  Gas  Light  stock. 

Merchants'  Exchange  stock. 

In  1837,  a  day's  trading  sometimes  amounted  only  to 
about  4,000  shares.  Even  as  late  as  the  outbreak  of  the 
Civil  War,  in  1861,  in  spite  of  the  enormous  advance  in 
wealth  and  enterprise,  only  twenty-two  stocks  were  dealt 
in  on  the  New  York  Stock  Exchange,  in  more  than  frac- 
tional lots,  sixteen  of  them  being  railroad  shares. 

How  remarkable  is  the  change  which  has  since  taken 
place  will  appear  from  the  fact,  that  in  1906,  sales  of 
stocks  on  that  Exchange  amounted  to  289,425,000  shares, 
having  a  par  value  of  $28,942,500,000,  while  bonds  were 
sold  in  1905  to  the  value  of  over  $1,000,000,000.  More 
than  250  descriptions  of  stocks  were  dealt  in,  and  more 
than  four  hundred  and  fifty  varieties  of  bonds. 

In  the  eighty  years  or  so  since  the  whistle  of  a  locomo- 
tive was  first  heard  in  the  States,  a  change  has  been 
wrought  in  the  wealth  of  the  people,  the  volume  and 
value  of  securities  afloat  and  the  number  of  investors, 
which  is  one  of  the  marvels  of  the  world's  history.  It  is 
good  to  be  an  American  and  to  have  played  some  part  in 
the  betterment  of  conditions,  which  has  brought  about 
this  transformation. 

No  figures  are  at  hand,  at  all  important,  as  to  the  actual 
wealth  of  the  population  in  Washington's  day.  It  is 
known,  however,  that  by  1850,  wealth  had  grown  to  about 
$7,000,000,000  and  has  since  expanded  to  $95,000,000,- 
000.  In  1907,  the  country  is  rich  and  comfort  is  general, 
at  least  among  the  native  born.  Americans  earn  more, 


8  HOW  MONEY  IS  MADE 

live  better  and  save  more  than  their  forefathers  did. 
Thousands  are  now  capable  of  owning  a  few  shares  of 
stock  or  a  few  bonds,  compared  with  a  mere  handful  in 
the  year  of  adoption  of  the  Constitution,  and  there  are 
more  than  5,000  millionaires.  So  far  as  the  people  at 
large  are  concerned,  one  needs  only  to  refer  to  the  sav- 
ings bank  to  gain  a  clue  to  the  general  diffusion  of  wealth 
—8,635  depositors  in  1820,  with  total  deposits  of  only 
$1,139,000,  and  more  than  7,400,000  depositors  now,  while 
the  average  of  accounts  is  thrice  as  large. 

In  every  rank  of  life,  one  now  finds  investors  in  secur- 
ities, and  the  number  of  them  grows,  year  by  year,  as  the 
natural  product  of  the  thrift  of  a  busy  people,  laws  which 
give  equal  opportunities  to  all,  an  inspiring  climate,  boun- 
tiful harvests  from  our  rich  soils,  the  energy  shown  in 
every  branch  of  trade  and  manufacture,  the  discoveries  of 
coal,  oil  and  metals,  the  division  of  estates,  and  the  oppor- 
tunities for  profitable  speculation. 

Here,  as  in  older  countries,  in  which  there  is  entire 
freedom  of  thought  and  action,  and  which  have  risen 
from  primitive  conditions  to  wealth  and  prosperity,  thou- 
sands of  workmen  have  passed  the  stage  where  they  often 
lacked  bread  to  eat,  and  have  saved  a  few  thousand  dollars 
and  bought  a  few  bonds  or  shares  of  stock.  Many  a  village 
blacksmith  and  smart  carpenter  and  grimy  toiler  in  an 
iron  mill  is  thus  a  capitalist  on  a  small  scale.  More  than 
40,000  employes  of  the  United  States  Steel  Corporation 
alone  are  owners  of  stock  in  that  concern.  In  New  Eng- 
land, operatives  are  taking  shares  in  the  cotton  mills. 

Farmers,  who,  as  a  class,  formerly  struggled  under  the 
most  trying  conditions  for  a  bare  maintenance,  are  now 
recruiting  the  ranks  of  buyers  of  securities.  A  notable 


A  NATION  OF  INVESTORS  9 

circumstance  is  the  fact  that  in  the  West  hundreds  of 
small  banks  have  been  organized  in  the  last  ten  years,  an 
appreciable  part  of  whose  stock  has  been  subscribed  for  by 
farmers. 

Among  the  millions  who  are  under  salary  as  managers, 
teachers,  journalists,  officials  and  clerks,  or  who  conduct 
small  retail  stores,  there  is  now  an  army  of  frugal  people 
who  seek  a  larger  return  on  their  modest  accumulations 
than  a  savings  bank  affords  and  who  are  receiving  from  5 
to  7  per  cent,  from  stocks  and  bonds  which  they  have 
bought. 

A  curious  instance  is  known,  in  which  the  chambermaids 
and  serving  men  of  a  Southern  city  became  stockholders 
in  a  local  shipyard,  started  for  repair  of  the  swarm  of 
fishing  and  truck  boats  owned  on  Chesapeake  Bay. 

In  the  cities,  a  vast  number  of  people,  men  and  women, 
are  owners  of  from  five  to  twenty  shares  of  bank,  gas, 
or  street  railroad  stock. 

There  is  little  need  to  multiply  instances,  since  it  is 
within  the  knowledge  of  every  one,  that  investors  are  now 
to  be  found  on  every  side  among  the  ranks  of  people  of 
moderate  means,  as  well  as  among  the  men  of  wealth. 
Without  dwelling  further  on  the  point,  suffice  it  to  say 
that  Americans  have  fully  learned  the  desirability  of  in- 
vestment in  securities  and  the  United  States  has  become 
a  nation  of  investors. 

There  are  no  statistics  as  to  the  exact  or  even  approxi- 
mate number  of  investors  in  America.  It  is  doubtful  if 
any  useful  object  would  be  served,  if  the  number  could 
be  known.  As  long  as  the  assessor  and  tax  collector  flour- 
ish in  the  land,  insurmountable  difficulties  will  stand  in 
the  way  of  an  accurate  census  of  security  owners,  although 


10  HOW  MONEY  IS  MADE 

the  facts  would  be  interesting  enough.  A  few  of  the  fore- 
most corporations,  like  the  Pennsylvania  Eailroad  and  the 
United  States  Steel  concern,  have  taken  pride  in  publish- 
ing the  number  of  their  stockholders;  but  they  are 
exceptions,  and  a  policy  of  secrecy  prevails  among  the 
majority  of  other  stock  companies.  A  few  years  ago,  one 
of  the  New  York  mercantile  agencies  made  a  strong  effort 
to  compile  the  total  number  of  stockholders  in  leading 
railroads  but  was  obliged  to  abandon  a  task  made  impos- 
sible by  official  indifference. 


II 

HOW  AN  INVESTOR  MAKES  MONEY 

GREAT  EICHES  POSSIBLE  IN  STOCKS. —  MOST    FORTUNES    IN    AMERICA 
ENHANCED  BY  SECURITY  INVESTMENTS. —  HOW  THE    THING    IS  DONE 

TO  the  young  man  and  the  uninitiated,  one  of  the  most 
mysterious  of  phenomena  in  the  business  world  is 
the  accumulation  of  magnificent  fortunes  by  men  who 
began  life  without  a  dollar.  With  rare  and  conspicuous 
exceptions,  the  men  of  to-day  who  live  in  splendid  houses 
and  own  estates  in  the  country,  and  who  have  steam 
yachts,  motor  cars,  art  collections  and  practically  un- 
limited means,  have  come  up  from  poverty.  How  can 
such  fortunes  be  made  in  one  life-time  ?  Machiavelli  took 
the  ground,  that  no  man  could  ever  rise  to  great  wealth 
or  power,  without  the  use  of  either  force  or  fraud.  This 
might  have  been  true  in  his  times  and  country.  It  may  be 
true,  in  these  times  and  this  country,  of  more  than  one 
man  who  has  obtained  opulence  by  trampling  others  un- 
der foot  or  by  taking  unfair  advantage  of  his  countrymen. 
But  the  assertion  is  not  true  of  every  rich  man;  it  is  not 
even  true  of  many ;  and  the  life  story  of  such  men  as  Mar- 
shall Field,  J.  P.  Morgan,  George  Peabody,  John  W.  Mac- 
kay  and  thousands  of  other  well-known  Americans  is  a 
sufficient  refutation  of  Machiavelli 's  heartless  and  im- 
moral doctrine. 

11 


12  HOW  MONEY  IS  MADE 

But  how  do  rich  men  make  their  money?  What  is  the 
process  ?  Is  the  way  yet  open  to  men  of  moderate  means  ? 
Can  a  young  man,  who  starts  in  life  with  a  clear  head, 
an  honest  heart,  a  strong  physique,  and  a  willing  spirit, 
but  without  a  cent  to  his  name,  ever  expect  under  present 
circumstances  to  gain  such  opulence  as  other  men  enjoy? 
The  answer  is,  certainly;  and  John  D.  Rockefeller  and 
Andrew  Carnegie  are  authority  for  the  statement  and 
they  ought  to  know. 

While  there  is  more  than  one  way  to  make  money,  it  is 
an  interesting  fact,  that  most  of  the  conspicuous  fortunes 
in  America  have  been  enhanced  by,  and  thousands  of 
them  have  been  chiefly  due  to,  investments  in  stocks ;  and 
it  may  also  be  stated  that  the  majority  of  men  make  their 
big  money  after  they  are  fifty  years  of  age.  Every  young 
man  who  has  saved  a/  thousand  dollars  can  take  his  place 
among  the  capitalists  of  the  future,  if  he  will  depend  upon 
some  regular  occupation  for  his  means  of  support,  and 
will  spend  a  reasonable  amount  of  his  leisure  time  in  the 
study  of  finance,  the  tariff  and  banking,  and  will  follow 
sound  and  sane  methods  in  his  security  investments  and 
cultivate  his  own  judgment  and  powers  of  intuition. 
Such  a  man  ought  readily  to  be  worth  a  million  at  middle 
age.  Does  this  seem  a  chimerical  idea  ?  Let  us  see,  as  we 
go  on. 

Before  passing  on,  however,  let  the  writer  disavow  any 
intention  to  encourage  active  speculation  in  stocks.  His 
purpose  is  a  different  one.  So  far  as  that  is  concerned, 
however,  nothing  that  any  man  can  say  will  ever  put  an 
end  to  speculation,  which  is  the  principle  of  barter  car- 
ried to  the  point  of  taking  risks.  Bold  spirits  have  always 
speculated  in  something,  from  the  days  of  primitive  man 


HOW  AN  INVESTOR  MAKES  MONEY         13 

— in  lands,  cattle,  mines,  mulberry  trees,  tulips,  potatoes, 
iron,  gold,  grain,  beans  and  whatever  else  has  been  in 
great  demand  at  different  periods  in  the  world's  history. 
No  power  on  earth  has  ever  been  able  to  prevent  this. 
The  instinct  to  make  money  by  buying  something  or  creat- 
ing something,  which  stands  a  chance  of  being  sold  at  an 
advance,  is  deeply  implanted  in  the  human  breast;  and 
the  necessity  of  making  money  by  some  such  process  is  so 
imperative  to  the  majority  of  men,  and  there  are  so  few 
"sure  things"  in  life,  that  it  would  seem  to  be  as  useless 
to  try  and  stop  the  taking  of  risks,  as  to  seek  to  level  a 
brick  wall  by  throwing  dandelions  against  it. 

With  reference  to  taking  risks  in  stocks,  the  great  ob- 
jection is  that  many  persons  incur  them  without  the 
slightest  knowledge  of  Wall  Street  history  or  methods. 
Their  Wall  Street  ventures  are  unequivocal  gambles.  A 
deep  student,  be  he  a  plodder  or  a  man  of  genius,  will  suc- 
ceed, where  others  fail.  With  legitimate  business  as  a 
means  of  livelihood,  with  close  study  of  underlying  fac- 
tors, infinite  patience  and  conservative  methods,  an  in- 
vestment in  stocks  should  be  profitable  in  nine  cases  out 
of  ten.  An  investor  would  then  be  following  the  line  of 
action,  by  which  the  captains  of  finance  have  been  able 
to  amass  riches  in  Wall  Street. 

Long  ago,  it  was  observed  that  the  market  prices  of  all 
securities  were  subject  to  serious  variations.  In  the  early 
part  of  the  last  century,  bank  stocks  sometimes  sold  for  50 
per  cent  premium.  Bonds  often  sold  below  par.  The 
stocks  of  various  of  the  pioneer  railroads  underwent  fluc- 
tuations of  great  violence.  Some  of  the  first  railroad 
lines,  especially  in  the  West,  and  more  particu- 
larly those  which  were  fostered  by  Government 


14:  HOW  MONEY  IS  MADE 

land  grants,  were  built  while  population  was  scanty 
and  before  the  routes  traversed  could  supply  business 
enough  to  ensure  dividends  or  even  the  expense  of  opera- 
tion. Each  railroad  proved  a  powerful  stimulus  to  local 
trade  and  to  the  value  of  lands ;  but  the  companies  them- 
selves often  languished  for  years  and  many  of  them  be- 
came insolvent  for  lack  of  money.  The  decline  in  value 
of  the  stocks  of  some  of  those  roads  will  never  be  forgotten 
by  men  yet  living.  On  the  other  hand,  the  bankers  who 
financed,  the  men  who  managed,  and  the  larger  stock- 
holders who  clung  to  those  corporations,  during  their 
years  of  trial  and  until  settlement  had  wrought  its  mir- 
acles of  development,  discovered  one  secret  of  great  wealth 
in  the  rise  in  value  of  their  stocks  when  dividends  had 
become  assured. 

Even  among  stocks  on  which  dividends  had  always  been 
paid,  extreme  fluctuations  in  price  were  witnessed  from 
year  to  year,  and  season  to  season,  in  response  to  trade 
conditions,  the  abundance  of  money  and  the  public  de- 
mand for  securities. 

It  certainly  took  no  observing  man  long  to  grasp  the 
fact,  that  the  varying  price  of  securities  supplied  an  op- 
portunity for  profits  much  beyond  the  income  to  be  de- 
rived from  them  as  investments.  Cool  and  far  sighted 
men  have  materially  added  to,  and  made,  fortunes  in 
stocks,  carefully  bought  in  years  of  panic  and  depression 
and  sold  in  later  periods  of  prosperity. 

The  primary  object  of  every  man  who  buys  a  share  of 
stock  or  a  bond  is,  and  should  be,  to  invest  his  surplus 
money  safely  and  derive  a  suitable  income  therefrom. 
But  it  is  a  maxim  of  Wall  Street,  that ' '  a  good  investment 
is  a  good  speculation."  It  is  so  indeed.  If  properly 


HOW  AN  INVESTOR  MAKES  MONEY          15 

bought,  stocks  will  in  time  show  an  increment  on  the  pur- 
chase price.  A  few  examples  of  fortunes,  which  have  been 
made  in  stock  investments,  will  not  be  out  of  place.  They 
are  taken  from  the  history  of  the  last  generation. 

Commodore  Vanderbilt  began  life  as  the  owner  of  a 
canoe,  which  he  sailed  as  a  ferry  boat  from  New  York  to 
Staten  Island.  He  borrowed  money  to  go  into  a  steam 
ferry  line  and  extended  his  operations  to  steamboats  in 
general.  Late  in  life,  he  went  into  railroads  and  made  the 
name  of  his  family  famous  by  buying  good  stocks  when 
they  were  cheap  and  selling  some  of  them  afterward  at  an 
advance,  often  at  almost  fabulous  prices. 

Moses  Taylor,  who  had  grown  up  in  the  mercantile  busi- 
ness in  New  York,  surprised  even  some  of  his  business 
associates  by  dying  worth  $40,000,000,  made  by  backing 
Delaware,  Lackawanna  &  Western  at  a  critical  period  in 
its  affairs  and  after  a  thorough  investigation. 

The  Astors  owe  their  immense  holdings  by  no  means 
entirely  to  real  estate.  They  have  always  been  careful 
and  shrewd  buyers  of  stocks  in  violent  declines.  They  are 
often  in  the  stock  market. 

Crocker,  Huntington,  Stanford  and  others  of  that  group 
of  remarkable  men  were  merchants  in  a  small  way  in  the 
neighborhood  of  the  California  gold  mines.  Their  for- 
tunes were  due  in  part  to  railroad  contracts  but  mainly 
to  the  rise  in  value  of  the  stocks  owned  by  them. 

Jay  Gould,  one  of  the  most  daring  and  intellectual  men 
Wall  Street  has  ever  known,  left  more  than  $70,000,000  to 
his  family,  the  bulk  of  which  arose  from  the  purchase  of 
stocks  in  times  of  depression  and  their  appreciation  in 
price  after  he  had  built  up  the  properties  they  repre- 
sented. 


16  HOW  MONEY  IS  MADE 

George  Peabody  derived  his  great  wealth  from  stocks, 
bought  and  sold  wisely. 

Thousands  of  other  men,  some  of  them  not  known  out- 
side of  their  immediate  circles,  until  the  Probate  Court  or 
their  gifts  to  public  objects  revealed  the  extent  of  their 
possessions,  acquired  entire  financial  ease  through  stocks, 
bought  when  they  were  low  and  sold  advantageously  when 
they  were  high. 

What  took  place  in  that  respect  during  the  last  gener- 
ation is  being  also  done,  to-day,  by  a  throng  of  men,  on 
every  side,  who  have  risen  from  modest  beginnings  in 
trade,  mines,  manufactures,  etc.,  and  are  now  among  the 
captains  of  finance  and  industry  in  these  States. 

Among  the  men  who  have  added  to  their  wealth  by  stock 
investments,  there  are,  of  course,  a  few  persons  of  excep- 
tional qualities,  who  have  themselves  called  into  play  the 
forces,  which  made  stocks  in  general  or  those  in  which 
they  were  particularly  interested,  high  or  low.  All  the 
others,  and  that  means  all  except  one  out  of  every  thou- 
sand, have  simply  taken  advantage  of  the  situation  as  they 
found  it.  They  bought  stocks,  when  they  could  do  so, 
safely  and  cheaply;  and  they  sold,  when  the  good  times 
or  the  manipulation  of  prices  by  insiders  had  forced 
stocks  to  high  figures.  It  is  this  policy  only  which  can  be 
followed  by  the  small  investor.  He  can  do  little  or  no- 
thing whatever  to  affect  the  price  of  stocks,  one  way  or 
the  other ;  but  he  can  buy  them,  when  they  are  extremely 
low,  all  things  considered,  and  he  can  sell  them  in  boom 
times,  at  or  near  the  top  of  a  long  rise. 

Now,  what  results  can  be  produced  in  a  series  of  years 
by  the  ordinary  investor? 

Suppose  that  a  young  man,  starting  in  1870  with  a  thou- 
sand dollars  which  he  had  earned  and  saved,  had  put  it 


HOW  AN  INVESTOR  MAKES  MONEY         17 

into  New  York  Central  stock.  That  was  an  approved  and 
good  stock,  with  a  great  future,  and  a  dividend  payer. 
Ten  shares  could  have  been  bought  for  $900.  New  York 
Central  has  always  been  an  investment  stock,  very  steady 
in  price,  and  very  safe.  If  the  investor,  starting  with  his 
ten  shares,  had  sold  the  stock  within  four  or  five  points  of 
the  top  of  every  considerable  rise,  and  had  reinvested  all 
the  money  in  New  York  Central  somewhere  near  the  bot- 
tom of  every  marked  decline,  from  1870  to  1905,  he  would 
have  been  worth  at  middle  age  the  sum  of  at  least  $150,000 ; 
and  this  would  have  taken  care  of  him,  all  the  rest  of  his 
life.  No  panic  could  have  touched  him,  because  his  shares 
would  have  been  fully  paid  for.  He  would  not  have  been 
obliged  to  go  into  the  market  and  give  an  order  (to  buy 
or  sell)  more  than  once  or  twice  a  year,  as  a  rule.  He 
would  have  learned  by  experience,  when  New  York  Cen- 
tral stock  was  too  high  to  keep,  and  conversely  when  it  was 
so  low  that  he  ought  to  buy  it.  He  would  have  had  to  be 
a  diligent  student  of  financial  conditions  in  general  and  of 
the  earnings  and  prospects  of  New  York  Central 
in  particular.  He  would  have  received  a  number 
of  dividends  while  the  stock  was  in  his  name 
between  times;  and  at  the  moments  of  reinvestment,  he 
would  always  have  had  a  little  surplus  cash  left  over  after 
making  his  purchases. 

If,  in  1870,  he  had  put  his  money  into  Illinois  Central, 
another  sedate  investment  stock,  with  a  great  record  as  a 
dividend  payer,  he  would  have  had  to  pay  about  $1,300 
for  ten  shares  of  it.  If  he  had  sold,  and  bought  again,  as 
above  outlined,  dealing  in  Illinois  Central  alone,  his  hold- 
ings would  have  grown  to  about  900  shares  by  1905,  worth 
about  $170,000,  all  the  outgrowth  of  the  original  $1,300. 

Ten    shares    of    Delaware,    Lackawanna    &    Western, 


18  HOW  MONEY  IS  MADE 

bought  in  1870,  for  $1,020,  would  have  grown  to  1,000 
shares  in  1905,  worth  about  half  a  million. 

There  were  fewer  stocks  to  choose  from  in  1870,  than 
now — only  about  seventy  actively  traded  in  at  the  New 
York  Stock  Exchange,  then,  compared  with  over  250  now. 
It  is  therefore  quite  possible,  that  a  neophyte  in  invest- 
ment in  1870  would  have  put  his  first  thousand  dollars 
into  some  stock,  which  afterward  ceased  to  pay  a  divi- 
dend for  a  time,  or  into  a  stock  which  did  not  pay  a  divi- 
dend even  then,  but  which  like  Union  Pacific  had  a  great 
and  certain  future. 

Suppose  that  he  had  gone  into  St.  Paul,  a  stock  with 
a  checkered  career,  but  now  a  gilt  edged  investment.  He 
could  have  bought  fifteen  shares  in  1870  for  $900,  paying 
about  $60  a  share.  In  1877,  St.  Paul  was  worth  as  low  as 
$11  a  share.  The  price  rebounded  from  that  low  figure 
and  in  1881  St.  Paul  sold  as  high  as  $12954.  In  1888, 
dividends  were  suspended  for  a  time.  Hundreds  of  men 
have  followed  the  fortunes  of  St.  Paul  through  good  and 
evil  days  until  the  present  time.  They  saw  the  stock*  rise 
to  $1983/4  in  1902.  If  an  investor  in  fifteen  shares  of  St. 
Paul  (bought  in  1870  for  $900)  had  sold  anywhere  near 
the  top  of  the  next  considerable  rise,  and  had  reinvested 
all  the  money  in  the  same  stock  anywhere  near  the  bottom 
of  the  next  heavy  decline,  and  had  pursued  this  policy  con- 
sistently, he  would  have  made  about  $2,000,000  by  1905. 

If  our  investor  had  chosen  Union  Pacific  for  his  studies 
and  investment,  from  1870  to  the  present  day,  he  could 
have  started  with  fifty  shares  costing  about  $1,000  and 
sold  out  his  interests  in  1905  for  something  like  $3,000,- 
000,  and  this,  too,  without  having  had  to  pay  the  assess- 
ment when  the  company  was  reorganized  in  1897. 


HOW  AN  INVESTOR  MAKES  MONEY        19 

Central  of  New  Jersey  would  have  yielded  about 
$6,000,000  in  thirty-five  years  from  an  original  invest- 
ment of  $950. 

Does  it  not  begin  to  be  clear  how  magnificent  fortunes 
have  been  made  in  stocks,  by  many  actual  investors? 

Now,  it  must  be  admitted,  at  once,  that  no  private  in- 
vestor can  ever  be  in  such  close  accord  with  the  ruling 
spirits  in  the  stock  market,  or  have  such  an  intimate  ac- 
quaintance with  underlying  conditions,  as  to  be  able  to 
know  when  the  exact  top  of  a  boom  has  been  reached,  or 
when  prices  are  actually  scraping  on  the  bottom  of  a  long 
decline.  An  outsider  can  never  sell  at  the  highest  or  buy 
at  the  lowest,  except  by  the  merest  accident ;  and  he  will 
probably  go  in,  or  out,  several  dollars  a  share  away  from 
those  extremes.  He  will  often  experience  the  chagrin  of 
seeing  his  favorite  stock  go  higher  after  he  has  sold  and 
lower  after  he  has  bought.  Allowance  has  been  made  for 
that  in  the  foregoing  calculations. 

No  man  can  expect  to  do  better  than  the  real  insiders. 
It  is  perfectly  understood  that  they  begin  to  sell,  a  little 
at  a  time,  on  the  way  up,  as  the  top  is  approached,  and 
they  begin  to  buy  "  on  a  scale  down ' '  as  the  market  is  near- 
ing  its  bottom.  The  real  point  for  an  investor  is  to  be  able 
to  tell,  approximately,  when  the  major  swings  of  the 
market,  extending  over  a  series  of  months  or  years,  are 
coming  near  their  turning  points.  That  is  near  enough 
for  him. 

But  this  is  the  very  gist  of  the  whole  matter.  How  shall 
a  man  know  when  to  go  in  and  when  to  go  out  of  stocks  ? 
In  order  to  accomplish  anything  like  the  results  referred 
to  above,  a  man  must  know  this  and  know  it  for  himself. 

An  investor  has  a  thousand  dollars  to  invest.    He  reads 


20  HOW  MONEY  IS  MADE 

the  daily  newspaper  for  a  week  and  he  notes  that  stocks 
go  up  to-day.  Tomorrow,  they  mysteriously  go  down,  for 
no  reason  at  all  that  he  can  see.  The  end-of-the-week 
financial  columns  discuss  the  general  situation;  and  the 
writers  are  blue  or  cheerful,  as  the  case  may  be,  and  what 
they  have  to  say  is  most  interesting  and  informing.  A 
very  few  of  them  are  bold  enough  to  say  now  and  then, 
in  their  own  phraseology,  " Investors,  the  time  has  come; 
buy  stocks  as  quickly  as  you  can."  Has  any  one  ever 
known  a  good  newspaper  to  advise  everybody  to  sell  their 
stocks  and  retire  from  the  market  ?  The  newspapers  can- 
not do  this.  They  can  and  do  call  attention  to  the  fact, 
when  distribution  is  in  progress.  But  this  is  as  far  as 
they  have  any  right  to  go,  considering  what  the  province 
of  a  newspaper  is.  The  reader  has  the  facts  and  must 
judge  for  himself. 

An  effort  will  be  made  in  following  chapters  to  supply 
an  investor  with  the  means  of  forming  his  own  judgment 
in  this  matter. 

An  investor  may  follow  one  of  two  courses.  He  may 
put  all  his  eggs  into  one  basket,  and  watch  the  basket. 
That  is  not  a  bad  policy,  and  it  is  the  only  one  which  may 
be  pursued  at  the  outset  of  the  future  capitalist's  career. 
A  little  later,  he  can  diversify  his  investments ;  and  there 
are  advantages  in  having  three  or  four  stocks,  moderate 
amounts  of  each,  one  or  two  of  them  industrials.  This 
latter  class  of  stocks  are  apt  to  swing  more  violently  and 
farther  than  the  railroad  securities.  In  case  industrials 
are  added  to  a  man's  investments,  those  stocks  are  prefer- 
able which  make  public  reports  and  which  supply  the  ac- 
tual data  from  which  the  fortunes  of  the  company  can  be 
followed.  No  need  to  specify. 


Ill 


BATE  OF  INTEREST  ON  INVESTMENTS 

2  PER  CENT  A  MONTH  COMMON  A  CENTURY  AGO. —  LEGAL  RATES  OP 
THE  PRESENT  DAY. —  THE  RETURN  NOW  TO  BE  LOOKED  FOR  ON 
MONEY  AND  SECURITIES 

BEFORE  passing  on  to  consider  the  more  important 
matters,  to  which  these  pages  are  devoted,  a  few 
elementary  facts  should  be  set  forth. 

First,  what  rate  of  return  on  investments  in  bonds  or 
stocks  may  an  investor  look  for?  When  a  man  has  saved 
his  first  thousand  dollars,  or  when  later  he  has  derived 
some  other  and  perhaps  larger  sum  from  his  private  busi- 
ness or  from  previous  investments,  what  shall  he  do  with, 
and  what  can  he  get  for  the  use  of  his  money  ? 

If  he  is  in  a  business  capable  of  extension,  the  natural 
use  of  surplus  earnings  would  be  an  increase  of  facilities 
for  carrying  on  his  regular  vocation.  Goods,  tools, 
machinery,  buildings,  ships,  or  working  capital  would  be 
added  to.  In  a  solvent  private  business,  it  is  held  that 
yearly  profits  must  be  around  25  per  cent,  more  or  less, 
in  good  years,  in  order  that  the  business  may  be  carried 
on  properly  in  the  lean  years,  when  profits  are  small,  or 
when,  to  maintain  an  organization  and  keep  one's  list  of 
customers,  the  owner  is  obliged  to  operate  without  profit 
or  possibly  at  some  loss  for  the  time  being. 

Among  manufacturing  corporations,  yearly  net  profits 


22  HOW  MONEY  IS  MADE 

range  from  4  to  15  per  cent,  this  moderate  return  being 
due  to  the  fact  that  the  percentage  of  profit  is  figured  on 
the  total  capital,  as  represented  by  the  stock  and  bonds, 
the  capital  being  inflated  in  most  cases  by  a  very  large 
and  perhaps  undue  issue  of  securities.  Standard  Oil  has 
divided  between  31  and  48  per  cent  annually  during  the 
last  ten  years,  but  this  is  an  exceptional  case.  If  the 
capital  stock  of  the  concern  were  as  heavily  watered  as 
that  of  most  industrial  corporations,  the  percentage  of 
profit  would  be  much  smaller.  In  a  manufacturing  busi- 
ness owned  by  a  private  firm  or  an  individual,  the  annual 
profits  would  need  to  run  from  20  to  25  per  cent  in  order 
to  provide  against  the  strain  of  bad  times,  which  occur 
regularly  and  cannot  be  avoided. 

But  while  such  a  return  on  the  money  invested  seems 
tempting,  on  the  face  of  the  matter,  there  are  many 
persons  who  do  not  care  to  undertake  the  responsibilities 
of  private  business,  with  its  labors  and  anxieties,  and 
others  have  sufficient  equipment  to  hold  their  own 
against  such  competition  as  they  are  exposed  to.  With 
them,  the  propriety  of  other  investments  presents  itself, 
when  a  sum  of  money  has  been  saved  beyond  the  cost  of 
living. 

An  abundance  of  investments  can  be  found  besides 
standard  stocks  and  bonds.  The  scope  of  this  work  does 
not  admit  of  consideration  of  them.  It  may  be  said  of 
stocks  and  bonds,  that  they  make  smaller  demands  upon 
the  time  and  personal  attention  of  the  investor  than  do 
promissory  notes,  rentable  real  estate,  shares  in  shipping, 
special  partnerships,  and  analagous  forms  of  investment. 
The  risk  is  no  greater,  provided  that  an  investor  is  as  cau- 
tious in  one  case  as  in  the  other,  especially  with  reference 


RATE  OF  INTEREST  ON  INVESTMENTS      23 

to  the  time  when  he  buys  and  the  price  he  pays.  The 
chances  of  selling  out  at  a  profit  are  larger.  Farther,  if 
one  wishes  to  withdraw  his  capital  from  an  investment 
in  standard  securities,  he  can  do  so  at  any  time  at  a 
moment's  notice,  by  sale  through  a  brokerage  office  or  a 
bank,  whereas  investments  of  the  nature  of  some  of  those 
mentioned  above  are  of  a  more  permanent  character  and 
cannot  usually  be  disposed  of  quickly  or  to  advantage. 

The  income  to  be  expected  from  stocks  or  bonds  corres- 
ponds rather  closely  to  the  average  rate  of  interest  on 
long  time  loans  of  money  (four  months  or  more)  in  New 
York  city,  the  financial  center  of  the  country. 

In  early  times,  the  scarcity  of  money  made  interest 
rates  high.  It  was  not  at  all  uncommon  to  obtain  15  or 
25  per  cent  upon  loans  or  ready  money.  Wealth  was 
limited  and  surplus  capital  extremely  small.  Supply  and 
demand  always  regulate  rates  of  interest  with  an  iron 
hand.  The  law  is  effective  all  over  the  world.  In  Eng- 
land, a  few  centuries  ago,  and  indeed  in  Europe  generally, 
until  the  Spaniards  began  to  pour  the  gold  and  silver  of 
Mexico  and  Peru  into  the  old  world,  ten  per  cent  was  the 
ruling  rate  of  interest.  Higher  rates  were  paid  by  those 
who  needed  money  badly  to  those  who  loaned  it.  In  Eng- 
land, the  growing  wealth  of  the  country  gradually  brought 
the  ruling  rate  down  to  between  2  and  4  per  cent  where  it 
stands  to-day.  If  the  rate  for  time  loans  goes  much  above 
4  per  cent  in  England,  now,  it  is  only  because  money  strin- 
gency, or  possibly  a  panic,  threatens  the  commercial  world. 
In  France,  a  high  rate  of  interest  was  current,  until  the 
development  of  industry,  the  enterprise  and  the  riches 
of  the  people  caused  it  to  fall  to  5  per  cent  and  finally  to 
2  and  3  per  cent.  In  Germany  and  Holland,  low  rates 


24  HOW  MONEY  IS  MADE 

have  reigned  for  centuries  on  account  of  the  thrift  and 
prosperity  of  the  people. 

In  various  of  the  newer  sections  of  the  United  States, 
where  conditions  have  been  similar  to  those  in  early  times 
in  the  East,  high  rates  were  common  down  to  the  middle 
of  the  last  century.  Two  per  cent  a  month,  equal  to  24  per 
cent  a  year,  and  even  more,  was  once  paid  in  California 
and  other  sparsely  settled  sections  of  the  Western  coun- 
try. The  great  profits  of  the  pioneer  bankers  in  the  ter- 
ritories and  on  the  Pacific  coast  were  obviously  due,  in 
part,  to  the  high  price  which  merchants  and  others  were 
willing  to  pay  for  the  use  of  loanable  funds.  A  trifling 
incident,  which  affords  an  insight  .into  the  conditions  of 
forty  years  ago  in  the  West,  is  told  by  an  Illinoisan,  now 
resident  in  New  York,  who  was  a  small  merchant  in  one 
of  the  towns  of  his  State,  when  he  was  married.  He  was 
then  worth  $6,000 ;  and  it  was  agreed  between  his  wife  ,and 
himself,  that  when  they  were  worth  $10,000,  he  would  re- 
tire from  business.  He  could  get  2  per  cent  a  month  for 
the  use  of  his  money,  and  this  would  yield  an  income  of 
$2,400  a  year.  In  those  days,  it  was  fashionable  to  be 
economical ;  and  the  couple  did  not  know  what  they  could 
do  with  $2,400  a  year.  But  Illinois  settled  rapidly,  the 
people  grew  prosperous,  great  crops  of  grain  brought  mil- 
lions of  money  into  the  West,  and  interest  rates  declined. 
The  time  when  $2,400  a  year  could  be  realized  on  $10,000 
of  capital  passed.  Our  Illinois  merchant  is  yet  in  busi- 
ness. 

The  legal  rate  of  interest,  to-day,  is  6  per  cent  in  New 
England  and  the  Middle  States;  from  5  to  8  per  cent  in 
the  West  and  South.  Each  State  has  its  own  laws;  but 
nowhere  is  the  legal  rate  over  8  per  cent. 


RATE  OF  INTEREST  ON  INVESTMENTS     25 

It  is  true  that  a  higher  rate  of  interest  is  allowed  in 
many  of  the  States,  when  the  parties  to  the  loan  agree 
upon  the  same  by  private  contract.  In  the  West  and 
South,  10  and  12  per  cent  is  the  limit.  Money  never 
brings  such  rates,  however,  except  during  periods  of 
great  stringency  and  for  a  short  time.  In  Maine,  Massa- 
chusetts, Rhode  Island,  California,  Colorado,  Arizona, 
Montana  and  Nevada,  "any  rate"  is  legal  when  agreed 
upon  by  private  contract ;  and  in  New  York,  "any  rate  is 
permitted  on  call  loans  of  $5,000  or  more  on  collateral 
security.  It  is  under  this  provision  of  the  law,  that  such 
extravagant  rates  for  temporary  accommodation  were  seen 
in  New  York  city,  as  125  per  cent  in  December,  1905,  127 
per  cent  in  October,  1896,  and  186  per  cent  in  1899  and 
1890. 

But  while  the  rates  allowed  by  law  on  long  time  loans 
are  as  stated,  the  great  borrowers  of  money  in  this  country 
can  usually  obtain  ample  supplies  of  capital  at  modest 
figures.  The  cities  and  States  are  able  to  borrow  all  the 
funds  they  require  at  an  average  of  3^  to  4  per  cent; 
and  millions  have  been  loaned  to  the  United  States  govern- 
ment at  2  per  cent.  Railroads,  manufacturers  and  mer- 
chants can,  in  ordinary  times,  borrow  at  3^  to  5  per  cent, 
according  to  their  solvency  and  the  amount  of  security 
given.  In  years  of  considerable  stringency,  the  commer- 
cial community  which  generally  has  to  pay  the  highest 
rate  of  interest,  is  sometimes  charged  7  or  8  per  cent  on 
time  loans  for  a  short  period.  In  1873,  24  per  cent  was 
charged  in  New  York  on  commercial  paper,  and  in  1893, 15 
per  cent  was  asked,  but  exceptional  cases  like  these  are 
not  to  be  considered.  Rates  of  that  character  were  simply 
due  to  spasms  in  the  money  market  and  were  of  short  dur- 


26  HOW  MONEY  IS  MADE 

ation.  In  ordinary  times,  and  for  a  period  of  years,  the 
ruling  rate  of  interest  on  long  time  loans  seldom  goes  far 
from  3^2  to  5  per  cent  for  the  bulk  of  the  business,  with 
an  average  of  about  4  to  perhaps  4^2.  This  is  the  amount 
of  return  an  investor  can  expect  from  safe,  sound,  ap- 
proved security  investments.  Conservative  men  are  even 
of  the  opinion,  that  securities  which  pay  a  larger  yield 
on  the  money  invested  are  dangerous,  although  this  idea 
is  open  to  discussion. 

The  range  of  interest  rates  on  time  loans  for  four 
months  or  more  in  New  York  city,  since  1890,  have  been 
as  follows : 

1890  4  y2  @    9         Average,  5  % 

1891 4  %  @    6  1/2  "  5  y2 

1892 2  V2  @    6  "  4  % 

1893  2%@10  "  5y2 

1894 2       @4  "  3 

1895 2       @    6  "  3y2 

1896 3       @12  "  5% 

1897 2  %  @    5  "  314 

1898  3       @6  "  3% 

1899  2       @    6  "  4% 

1900 3       @6  "  4% 

1901  3       @    5V2  "  4% 

1902 4       @    6  y2  "  5 

1903  4       @6  "  5% 

1904  2       @    5  "  3y2 

1905  2  y2  @    6  %  "  4 

1906 4%@    8  "  5% 

1907   4       @    8  "        5% 

1908   2  y2  @    7  "        3  % 

An  investor  will  therefore  look  for  a  return  of  4  per 
cent  or  a  trifle  more  from  money,  which  he  puts  into  rail- 
road stocks  or  bonds.  If  those  securities  sell  at  prices 
which  would  make  the  yield  5  or  6  per  cent,  as  they 


RATE  OF  INTEREST  ON  INVESTMENTS     27 

usually  do  in  panic  years,  they  are  a  purchase,  assuming 
that  in  the  case  of  any  particular  company,  the  corpora- 
tion is  solvent  and  its  finances  in  good  shape.  A  larger 
return  can  be  expected  on  industrial  investments,  which 
ought  to  yield  from  6  to  7  per  cent,  ordinarily,  to  compen- 
sate the  investor  for  the  larger  risk.  Bonds  are  more 
stable  in  price  than  stocks;  and  those  whose  soundness 
is  beyond  question  seldom  fall  below  an  investment  yield 
of  4  or  ±l/2  per  cent.  If  the  companies  which  have  issued 
them  are  strong,  and,  if  for  any  reason,  such  as  the  preva- 
lence of  panic  or  high  money,  they  can  be  bought  to  re- 
turn anything  like  5  per  cent,  they  are  a  purchase. 

A  discussion  is  now  in  progess  among  financiers  and 
students,  as  to  the  probable  effect  of  the  increasing  gold 
supply  upon  prices  and  rates  of  interest.  It  is  the  opin- 
ion of  many,  that  such  enormous  additions  as  are  now 
being  made  to  the  gold  money  of  the  world  must  tend,  in 
time,  to  lower  the  rate  of  interest  and  raise  the  sell- 
ing price  of  bonds.  This  position  is  strongly  opposed  by 
others,  of  whom  Prof.  Joseph  F.  Johnson  of  New  York 
is  one,  who  maintain  that  gold  inflation  must  stimulate 
enterprise  and  increase  the  demand  for  the  use  of  money 
and  thus  maintain  interest  rates.  John  Moody 's  theory  is, 
that  the  rate  of  interest  will  rise  and  that  bonds  and  other 
fixed  income  securities  will  decline,  while  stocks  and  those 
securities  whose  incomes  increase  as  the  production  of 
wealth  increases  will  appreciate  in  value.  While  the  con- 
troversy is  interesting,  the  influence  of  the  flood  of  gold 
now  being  poured  into  circulation  will  obviously  not  be 
immediate  and  can  only  be  made  clear  by  the  lapse  of  time. 


IV 

BONDS 

THIS  CLASS'OF  SECURITIES  DEFINED. —  HOW  TO   JUDGE   OF  THE  SAFETY 
OF  A  BOND. —  MARKET  PRICES  OF  VARIOUS  ISSUES 

BONDS  may  be  bought  through  any  bank  or  brokerage 
house  in  any  part  of  the  United  States. 

They  are  issued  in  denominations  of  $1,000  each,  ordi- 
narily, although  bonds  for  $500  can  sometimes  be  bought. 
They  are  put  forth  by  railroad  companies,  public  service 
and  industrial  corporations,  and  by  municipal,  State  and 
the  national  governments. 

A  bond  is  evidence  of  a  loan  of  money.  Every  issue 
by  a  corporation  is  secured  by  a  mortgage  of  some  kind, 
on  a  portion,  or  all,  of  the  property  of  the  company ;  and 
this  document  is  deposited  with  a  trust  company,  which 
acts  as  trustee.  Bonds  issued  under  a  first  mortgage  have 
priority  over  all  others;  and  the  interest  on  the  whole  of 
the  funded  debt  of  a  corporation  must  always  be  paid 
ahead  of  any  distribution  for  dividends  on  the  stock.  In 
case  of  default  in  payment  of  the  interest,  holders  of  the 
bonds  may  foreclose  the  mortgage  and  then,  being  in  full 
possession  of  the  property,  they  may  reorganize  the  con- 
cern, the  first  mortgage  bondholders  having  the  first  claim 
to  consideration. 

The  growth  of  the  country  and  the  necessity  for  addi- 
tional capital  have  compelled  most  railroad  companies  to 

28 


BONDS  29 

issue  several  different  classes  of  bonds.  The  value  of 
second  mortgage  and  other  junior  issues  depends  on  the 
total  value  of  the  property.  Junior  issues  are  often  prac- 
tically as  safe  and  sound  as  first  mortgage  bonds,  because 
the  original  issues  were  not  large,  and  because  the  prop- 
erty against  which  they  are  all  a  charge  is  of  equal  value 
to,  or  greater  than,  the  total  funded  debt,  and  the  com- 
pany is  perfectly  solvent. 

Debentures  are  generally  considered  a  junior  issue  of 
bonds,  because  they  are  printed  in  the  form  of  a  bond, 
with  coupons  attached;  but  they  are  in  fact  merely  the 
promissory  notes  of  the  company,  and  they  rank  as  such. 
If  the  corporation  which  issues  them  is  solvent,  they  are 
good  investments  and  often  bring  a  premium. 

Eailroad  equipment  notes  have  taken  their  place  as 
funded  debt  and  are  a  popular  investment.  They  are 
floated  for  the  purchase  of  cars,  locomotives  and  similar 
equipment.  There  was  formerly  some  laxity  in  the  mat- 
ter of  this  form  of  railroad  obligation  but  their  issue  is 
now  based  on  sound  principles.  It  is  conceivable  that  a 
railroad,  whose  equipment  notes  are  offered  for  sale,  might 
be  heavily  cumbered  with  debt  and  its  stock  sell  below 
par,  without  the  safety  of  the  equipment  notes  being 
affected.  The  cars  and  engines  are  pledged  for  the  pay- 
ment of  the  notes ;  and  the  company  is  required  to  main- 
tain them  in  good  condition.  The  equipment  really  be- 
longs to  the  banking  house,  which  has  financed  the  trans- 
action (or,  more  accurately,  to  the  holders  of  the  notes) 
and  they  constitute  the  security,  which  is  ample;  they 
cannot  become  the  property  of  the  company  until  the 
notes  are  paid.  These  notes  yield  about  5  per  cent  in- 
terest. About  $175,000,000  of  them  are  now  afloat. 


30  HOW  MONEY  IS  MADE 

Convertible  bonds  are  a  popular  feature  of  railroad 
finance.  The  convertible  feature  is  usually  intended  to 
give  the  bonds  a  speculative  value.  They  can  be  exchanged 
for  the  stock  of  the  company  under  certain  conditions. 
The  high  price  brought  by  Union  Pacific  convertible  4s  in 
1905  is  eloquent  testimony  to  the  popularity  of  that  class 
of  obligations. 

An  investor  in  bonds  should  concern  himself,  first  and 
foremost,  with  the  question  of  safety  of  the  investment 
and  assurance  of  regular  payment  of  interest.  Other  mat- 
ters may  also  be  taken  into  consideration,  but  they  are 
subordinate  to  the  point  above  referred  to.  Until  the 
safety  of  principal  is  evident,  an  investor  should  never 
buy  a  bond  of  any  kind.  Safety  is  the  corner-stone  of  suc- 
cess in  all  security  transactions ;  and  if  a  man  will  begin 
his  financial  career  with  this  idea  firmly  fixed  in  his 
mind  and  will  always  adhere  to  it,  he  will  have  learned 
the  first  grand  lesson  in  the  building  of  a  fortune  and 
will  never  have  cause  to  regret  his  action.  If  he  lacks  the 
facilities,  or  the  education,  which  would  enable  him  to 
investigate  personally,  then  he  should  buy  only  under  the 
guidance  of  a  bond  broker,  or  a  banking  house,  whose 
reputation  is  a  guarantee  that  the  securities  recommended 
are  of  the  highest  class. 

In  the  final  analysis,  safety  of  a  bond  depends  upon 
the  amount  of  property  in  good  condition,  owned  by  the 
company;  total  capitalization;  earnings;  and  priority  of 
other  liens.  It  follows  that  a  prudent  man  will  make  an 
effort  to  keep  himself  fully  informed  with  regard  to  the 
financial  status  of  the  corporations,  with  whose  fortunes 
he  has  allied  himself.  Indeed,  he  will  do  well  to  post  him- 
self before  he  buys.  He  ought  to  do  this,  some  time ;  and 


BONDS  31 

there  is  no  better  opportunity  than  before  he  has  com- 
mitted himself.  One  must  look  before  he  leaps  in  Wall 
Street. 

The  average  capitalization  of  the  railroads  in  the 
United  States  is  $64,265  a  mile,  of  which  $30,837  per  mile 
represents  the  stock  and  $33,428  the  bonded  debt.  To 
judge  whether  a  road's  capitalization  is  moderate  or  ex- 
cessive, it  is  necessary  to  consider  the  nature  of  the  route 
traversed,  whether  the  line  was  easy  to  build  or  the  re- 
verse, whether  it  is  a  single  track  or  a  four  track  line,  the 
volume  of  traffic  and  the  value  and  cost  of  terminals  in 
great  cities.  Capitalizations  vary  from  about  $35,000  to 
more  than  $200,000  a  mile.  As  the  bonded  debt  is  a 
mortgage  on  the  property,  its  total  volume  should  not  ex- 
ceed about  50  to  60  per  cent  of  the  value  of  the  property. 

Earnings  of  the  different  railroads  of  the  country,  for  a 
series  of  years,  and  a  great  mass  of  other  important  data, 
can  be  found  in  the  Manuals,  which  are  printed  by  several 
authorities,  annually,  revised  to  date. 

Current  earnings  appear  in  the  annual  and  other  re- 
ports of  all  railroads,  which  are  printed  in  the  financial 
newspapers  as  rapidly  as  they  appear.  If  an  investor 
is  not  a  subscriber  to  a  sound  and  conservative  financial 
publication,  he  cannot  become  one  too  soon.  He  will  thus 
obtain  all  important  statements  of  earnings  in  detail  and 
as  quickly  as  every  other  reader.  In  default  of  any  other 
method  of  getting  them,  an  investor  can  write  to  the  secre- 
taries of  the  corporations  themselves,  who  will  cheerfully 
supply  them.  If  a  corporation  publishes  no  reports,  if  it 
locks  up  in  the  secrecy  of  its  ledgers  and  vaults  the  facts 
upon  which  it  would  be  justified  in  asking  for  loans  of 
money,  the  public  can  protect  its  interests  only  by  letting 


32  HOW  MONEY  IS  MADE 

the  bonds  alone.  There  are  enough  good  things  in  the 
market  to  make  it  unnecessary  for  an  investor  to  plunge 
blindly  into  the  dangerous  business  of  buying  securities 
about  whose  value  he  can  learn  nothing. 

With  reference  to  the  safety  of  any  particular  railroad 
bond,  one  or  two  general  rules  apply.  It  is  seldom  that 
any  two  railroads  operate  under  precisely  the  same  condi- 
tions or  are  in  exactly  the  same  position  as  to  the  total 
volume  of  capitalization  or  the  relative  amounts  of  bonds 
and  stock.  If,  however,  earnings  for  a  few  years  past 
have  paid  all  expenses,  all  cost  of  maintenance,  the 
taxes,  interest  on  the  funded  debt  and  good  dividends  on 
the  stock,  and  especially  if,  in  addition  to  all  that,  they 
yield  some  surplus  besides,  the  bonds  must  be  deemed  a 
safe  investment.  It  is  held  by  railroad  men  that,  after 
cost  of  maintenance  has  been  deducted  from  earnings, 
then  from  60  to  65  per  cent  of  the  profits  should  pay  all 
fixed  charges,  that  is  to  say,  taxes  and  interest  on  the 
funded  debt.  If  80  per  cent  is  required,  an  investor 
should  take  advice  as  to  the  propriety  of  selling  his  bonds 
and  going  into  some  other  security. 

The  market  value  of  the  stock  of  a  railroad  is  some- 
times an  excellent  guide  to  the  value  of  the  bonds. 
Large  earnings  and  valuable  assests  ensure  a  high  price 
for  the  stock;  and  the  same  factors  ensure  the  safety  of 
the  bonds. 

Junior  issues  of  bonds  are  often  tempting,  because 
they  can  usually  be  bought  for  less  money  than  those  of 
a  higher  class.  The  net  return  in  interest  would  then  be 
larger.  But,  if  they  are  cheaper,  they  may  be  so,  be- 
cause the  risk  is  greater.  The  risk  is  a  matter  which 
must  be  considered. 

So  far  as  safety  of  principal  is  concerned,  the  nearest 


BONDS  33 

approximation  to  the  ideal  is  afforded  by  bonds  of  the 
United  States,  a  country  which  pays  its  debts  and  has  a 
phenomenal  record  in  this  respect.  Bonds  of  well  gov- 
erned cities  and  States  belong  in  this  class  also.  They 
are  always  in  demand,  fluctuate  little  in  value,  and  can 
always  be  sold  at  a  moment's  notice. 

Bonds  are  sold  by  banking  houses  engaged  in  the  busi- 
ness, on  the  basis  of  net  yield  in  income.  This  basis  is 
calculated  on  the  selling  price  of  the  issue,  the  rate 
of  interest  paid,  and  the  length  of  time  it  has  to  run. 
Tables  have  been  prepared,  which  show  at  a  glance  the 
net  return  upon  any  bond  at  a  particular  price.  When 
a  bond  is  said  to  sell  on  a  4.1  per  cent  basis  (or  any  other 
which  may  be  named)  the  figure  indicates  the  net  re- 
turn to  be  derived  by  an  investor,  at  the  selling  price 
named. 

The  rate  of  interest  paid  by  good  city  or  rail- 
road bonds  is  from  8^2  to  4^  per  cent.  If  a  bond  is 
thoroughly  sound  and  pays  from  5  to  6  per  cent  interest, 
it-  is  certain  to  sell  at  a  price  which  will  make  the  net  re- 
turn on  the  investment  as  above.  In  former  times,  when 
capital  was  scarce  and  rates  of  interest  high,  railroads 
were  obliged  to  bid  strongly  for  money;  and  millions  of 
dollars  worth  of  bonds  were  sold  by  them,  bearing  from 
6  to  10  per  cent  interest.  There  are  yet  afloat  about  $520,- 
000,000  of  such  bonds;  but  they  are  being  retired  as 
rapidly  as  circumstances  will  permit,  to  be  exchanged 
for  securities  bearing  a  lower  rate. 

Industrial  and  street  railroad  bonds  pay  from  4  to  6 
per  cent,  but,  if  they  are  safe  investments  (which  all  of 
them  are  not),  they  are  apt  to  sell  at  a  premium,  and  the 
net  return  is  in  the  vicinity  of  4  per  cent. 

That  a   railroad  bond  may  be   dangerous  is  evident 


34  HOW  MONEY  IS  MADE 

from  the  fact,  that  out  of  about  $6,873,000,000  of  funded 
debt  of  these  corporations,  fully  $275,000,000  of  the 
total  pay  no  interest  at  all  at  present. 

If  a  bond  sells  at  a  premium,  that  should  not  neces- 
sarily deter  an  investor  from  buying  it.  If  a  bond  is 
listed  on  the  New  York  stock  exchange,  or  if  it  has  a 
broad  and  quick  market,  or  if  it  belongs  to  the  class  of 
savings  bank  investments,  it  is  apt  to  bring  a  premium. 
Such  bonds  can  be  quickly  disposed  of,  at  any  time,  when 
the  investor  wishes  to  realize  on  them.  The  speculative  in- 
vestor is  apt  to  give  much  attention  to  bonds  which  do 
not  sell  at  a  premium.  And  it  may  be  well  to  say  that,  at 
the  present  time,  a  number  of  bond  houses  are  advising 
the  sale  of  high  class,  well  seasoned  and  thoroughly 
sound  investment  issues,  paying  6  per  cent  or  more,  which 
have  weathered  the  gales  of  adversity  and  are  selling  at 
a  good  premium,  especially  if  they  have  only  a  few  years 
to  run.  By  so  doing  the  investor  will  capitalize  his 
premium  before  there  is  any  reduction  in  price  as  the 
bonds  approach  maturity.  If  the  money  were  then  put 
into  bonds  selling  below  par  and  having  a  longer  term  to 
run,  it  is  held  that  income  will  remain  unimpaired,  while 
the  investor  will  put  himself  in  line  for  another  addition 
to  his  principal  through  the  future  increase  in  value  of  the 
new  investment. 

Men  who  care  most  for  safety  of  principal  fill  their 
safe  deposit  boxes  with  gilt-edged  bonds.  Most  of  them 
have  stocks,  especially  of  the  companies  with  whose 
management  they  are  identified.  Br.t  sound  bonds, 
which  yield  about  4  per  cent,  constitute  the  bulk  of  their 
permanent  holdings.  They  avoid  wildcat  securities  of 
every  kind  and  are  never  found  in  the  category  of  a  resi- 


BONDS  35 

dent  of  the  East,  who  died  ostensibly  worth  a  million 
and  whose  estate  could  show  securities  for  that  amount, 
which  were  worth  absolutely  nothing.  A  few  extremely 
conservative  men  exist,  like  the  wealthy  manufacturer 
who  sold  so  many  millions  of  oil  cloth  to  the  late  A.  T. 
Stewart,  who  never  buy  anything  except  bonds  and  who 
never  sell  a  good  one,  even  if  it  has  advanced  $100  or 
$200  in  value.  The  estates  which  are  left  to  women  and 
the  surplus  funds  of  savings  banks  and  insurance  com- 
panies are  largely  invested  in  this  class  of  gilt-edged 
securities.  These  examples  embody  the  best  judgment 
of  the  most  competent  men  in  the  field  of  finance,  on  the 
point  of  safety  of  capital  and  certainty  of  income. 

The  highest  class  of  investment  securities  are  beyond 
doubt  those  which  the  laws  of  the  State  of  New  York 
allow  savings  banks  to  purchase.  They  are  divided  into 
three  classes.  In  substance,  they  are  as  follows: 

Bonds  of  cities  of  not  less  than  45,000  inhabitants,  which  have 
been  incorporated  for  twenty-five  years,  and  have  never  de- 
faulted in  the  interest  or  on  the  principal  of  their  debts  for  more 
than  90  days  at  any  time,  said  cities  to  be  located  in  States^ 
which  were  admitted  to  the  Union  prior  to  1896  and  have  never 
defaulted  on  the  interest  or  principal  of  their  State  debts  since 
1860. 

Bonds  and  mortgages  on  real  estate,  unincumbered,  to  the 
amount  of  not  more  than  60  per  cent  of  the  value  of  the  property. 

First  mortgage  bonds  of  railroads  lying  mainly  within  the 
State  or  connected  with  and  controlled  by  such  railroads,  pro- 
vided that  there  has  been  no  default  on  principal  or  interest  of 
their  bonded  debts  within  five  years  of  the  investment,  and  pro- 
vided also  that  at  least  4  per  cent  in  dividends  has  been  paid  on 
all  the  outstanding  stock  within  the  same  five  years.  New  York 
also  allows  savings  banks  to  buy  the  first  mortgage  bonds  of  cer- 
tain other  railroads,  under  certain  conditions,  viz:  Boston  & 


36  HOW  MONEY  IS  MADE 

Maine;  Chicago  &  Northwestern;  Chicago,  Burlington  &  Quincy; 
Chicago,  Milwaukee  &  St.  Paul;  Chicago  &  Alton;  Delaware  & 
Hudson;  Delaware,  Lacka wanna  &  Western;  Michigan  Central; 
Maine  Central;  Illinois  Central;  Pennsylvania;  Morris  &  Essex; 
New  York,  New  Haven  &  Hartford;  United  Bailroads  of  New 
Jersey. 

This  is,  in  main,  the  law;  but  there  are  a  number  of 
minor  provisions  and  an  investor  who  wishes  to  be  fully 
informed  as  to  all  details  should  obtain  a  copy  of  it  for 
examination. 

A  good  3l/2  per  cent  bond  sells  in  the  market  for  from 
95  to  par— that  is  to  say,  from  $950  to  $1,000.  A  sound 

4  per  cent  bond  sells  for  $1,000  to  $1,050  normally ;  and 

5  per  cents,  from  $1,050  to  $1,200.     Prices  go  above  or 
below  these  figures  in  extreme  bull  or  bear  markets,  and 
in  accordance  with  monetary  conditions.     For  instance, 
Union  Pacific,  1st  lien  convertible  4s,  sold  as  high  as 
160^4  in  1906,  owing  to  the  rise  in  value  of  the  stock, 
for  which  they  could  be  exchanged.     Any  bond,  having 
a   long   time   to    run,    selling   much    under    the   prices 
above  quoted,  is  of  doubtful  security.    As  they  approach 
maturity,  all  bonds  tend  to  decline  to  par. 

An  example  of  a  first  class  bond  is  afforded  by  Central 
of  New  Jersey,  general  mortgage  5s.  In  the  crash  of 
1903,  they  never  sold  below  $1,260  and  they  have  since 
gone  to  $1,360.  During  the  last  five  years,  65  per  cent 
of  the  earnings  has  paid  all  expenses  and  fixed  charges 
and  left  from  8  to  10  per  cent  or  more  for  the  stock. 

On  the  other  hand,  Colorado  Midland,  1st  gold  4s,  sold 
in  1905  between  73  and  79.  The  earnings  of  the  com- 
pany did  not  even  fully  meet  the  interest  on  the  funded 
debt. 


BONDS  37 

As  an  illustration  of  another  class  of  bonds,  may  be 
cited  Central  of  Georgia,  3rd  preference  income  5s,  a 
junior  security.  They  ranged  in  1905  between  $525  and 
$835.  Other  issues  take  precedence  of  them.  Earnings 
do  not  pay  the  interest  on  the  funded  debt.  The  bonds 
in  question  rise  and  fall,  hand  in  hand  with  the  chang- 
ing chances  of  something  being  paid  upon  them  in  the 
way  of  interest. 

Changes  in  the  market  prices  of  the  highest  class  of 
purely  investment  bonds  afford  small  opportunity  for 
speculative  profits.  They  all  do  fluctuate  in  price,  how- 
ever, with  the  times  and  underlying  conditions.  No 
securities  are  proof  against  monetary  stringency,  panics, 
and  long  depression;  and  all  are  subject  to  the  inspiring 
and  lifting  influence  of  prosperity  and  a  lively  demand 
for  investments.  Abnormally  high  rates  of  interest  on 
money  depress  the  value  of  bonds  for  the  time  being  and 
a  prolonged  bear  campaign  in  stocks  has  the  same  effect. 
Excellent  bargains  in  bonds  can  be  found  in  such  periods. 
An  investor  needs  to  be  alert  at  such  times,  if  he  has 
money  standing  idle.  He  must  reason  that,  in  order  to 
make  his  principal  perfectly  safe,  the  bonds  he  buys  must 
have  a  good  chance  of  appreciation  in  value  at  some  later 
period.  Certainly,  he  would  not  buy  when  the  signs 
point  to  lower  prices. 

Men  who  have  only  a  little  money  to  invest  and  who 
are  absorbed  in  the  management  of  a  private  business 
can  give  little  attention  to  the  monthly  changes  in  the 
prices  of  bonds  and  ought  not  to  try  to  speculate  in 
them.  A  class  of  well-to-do  m'en  exists,  however,  who 
have  the  time  and  a  liking  for  such  matters,  and  who 
have  considerable  experience  and  a  knowledge  of  finan- 


38  HOW  MONEY  IS  MADE 

cial  matters;  and  they  make  a  specialty  of  buying  broad 
trading  bonds,  even  if  not  of  the  highest  grade,  whenever 
there  is  a  smash  in  the  stock  market  or  when  extremely 
high  rates  of  interest  prevail.  They  reason  that  if  the 
bonds  go  lower,  they  can  be  retained  as  investments, 
whereas  when  the  bond  market  rallies,  as  it  is  certain 
to  do  in  time,  the  securities  can  be  sold  at  an  advance 
larger  than  the  percentage  of  interest  which  has  mean- 
while accrued.  In  this  way,  while  dealing  in  the  class 
of  securities  which  best  safeguards  their  principal,  they 
add  something  to  their  capital. 

From  1893  to  1905,  Missouri,  Kansas  &  Texas,  1st  gold 
4s,  rose  from  $690  to  about  $1,040 ;  and  Texas  &  Pacific, 
1st  gold  5s,  advanced  from  $590  to  $1,250  or  more. 
United  States  Steel,  5s,  sold  as  low  as  65  in  1903  and 
have  since  risen  to  par. 

In  the  terrible  financial  reaction  of  1903,  many  bonds 
fell  from  eleven  to  twenty-eight  and  one  half  points  (be- 
tween $110  and  $285)  and  supplied  excellent  chances 
for  profitable  investment.  Among  them  were: 

High,  1902  Low,  1903  Decline 

Atchiaon,  adj.  4s,  1995  97           86  11 

Bait.  &  Ohio,  conv.  deb.  4s,  1911 118           94  24 

Cent.  Ga.,  1st  pref .  inc.  5s,  1945 89  %       61  28  y2 

Ch.  &  East  Ills,  gen.  con.  1st  5s,  1937 126  %  113  13  % 

Ch.,  Mil.  &  St.  Paul,  gen.  mge  A,  4s,  1989  117  103  14 

Ch.,  E.  I.  &  Pac.,  gen.  4s,  1988 113  %       99  14  % 

Mex.  Central,  1st  con.  inc.  3s,  1939 36  %       12  %  24 

Minn.  &  St.  Louis,  1st  con.  5s,  1934 124  %  109  15  % 

N.  Y.  Central  gold  3%s,  1997 109  %       95  14  % 

Lake  Shore,  coll.  3%s,  1997 98           87  11 

Penna.  conv.  gold  3%s,  1912 112  %       93  %  18  % 

Southern  Ewy,  1st  consol.  5s,  1994 124  111  %  12  % 

Texas  &  Pac.,  2d  gold  inc.  5s,  2000 102  %       81  21  % 

Union  Pac.,  1st  lien  conv.  4s,  1911 113  %       90  %  23  % 


BONDS  39 

In  1905,  nearly  all  of  these  bonds  returned  to  the  high 
values  of  1902  and  several  of  them  went  higher.  Union 
Pacific  4s  sold  as  high  as  150J^  and  the  Central  of  Geor- 
gia bonds  above  noted  went  to  101. 

There  is  another  class  of  bonds,  which  present  great 
attractions  to  men  who  are  able  to  assume  a  business  risk 
and  possess  the  patience  to  wait  a  series  of  years.  These 
are  the  prior  lien  bonds  of  small  railroad  systems,  which 
range  at  a  low  level  during  periods  of  depression.  Some 
of  the  new  and  yet  undistributed  bond  issues  belong  in 
this  class  of  speculative  bond  investments.  As  for  the 
bonds  of  small  railroads,  there  is  always  the  chance  that 
they  may  be  taken  into  some  one  of  the  larger  systems, 
and  the  bonds  will  receive  favorable  consideration  in 
the  succeeding  readjustment  of  the  finances. 

Remembering  always  that  the  small  investor  will,  if 
prudent,  have  nothing  to  do  with  bonds  whose  safety  is 
doubtful,  even  then  it  remains  true  that  he  will  not  buy 
in  the  height  of  a  booming  market.  Indeed,  if  he  then 
has  any  securities  which  are  quoted  well  above  the  high 
prices  of  recent  years,  he  will  do  well  to  sell  them,  bank 
the  money,  and  bide  his  time,  until  the  bonds  have  once 
more  fallen  below  the  average  of  the  last  two  or  three 
years.  He  will  then  reinvest. 

Four  per  cent  bonds  selling  somewhat  under  par,  are 
now  the  most  popular  form  of  permanent  investment. 

As  an  illustration  of  the  changes  in  price  of  bonds  dur- 
ing any  given  year  or  series  of  years,  a  few  of  them  are 
shown  in  the  table  below  with  their  highest  and  lowest 
quotations  since  1890  inclusive: 


40 


'6861  '«*  'V  '93ra 


HOW  MONEY  IS  MADE 


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i-M 

t-Ti< 


H|lM  IHJOO 


C50OO5OOMl>.O 
OOOiHrHOOi-I 


'S06I  'sl  'losuoo 
•pwrj  ^g  V  'TTH  "il 


'8I6T  '8S  'q»P 
•/fcramfr  ^'Jng'-qo 


T- 
QOClOOOt^-rJ< 


«O"OOCO«OCOiacO-«*QO 
O5O>OOOO5OiOOOJOO 


OOOOlOi 


U86T  'ss  *9Sl[:tI  T193 
•sin  ^swa  9  -no 


rJ<COTH-^<MeOO5t^b-l^«Or-) 
0000000»Hi-ICI(M(M 


CI(M(M<M<M(MTHr-( 


lOt-CO^tO 


<N 


•sg  pfo3  -uoo  ^si 


rHCMr-l 


H«  He«  H«  wl^1  HN  wi-*  H«  «!•*  HN  Hw  H" 

CO<Mt-»COO<MiHTt(QO»HTH<MeOOSO<MO5«OCO 


OTTO  V  " 


<MTt<r-IOi-ICOOl^r-! 


t^rH"<^?DCO<M«OO 
CO^COCOCOCOtMCO 


<Ot-05<NOrHOCOCiCOl-t-COCOa001lOeOt>. 
OOOOrHrHT-(OOi-(i-IC1CO<MC^COC<|T-lr-l 


•a 


•ss-J 

UJQ^tlOg  'UBQ 


ia|co  «f*'  oeN1 

^lO«O-^COrt< 


r 

"*CqiOC5i005lOQOL-t>10lO^(M 
OOOOJ0000000000 


000050 


•sg  *ST  • 

V  * 


'Sf  61  ' 


co  oo  cctaccj  t- 

i-HOrHiHOOTHOO 


•S66T  '«»  "3  'FP« 


BONDS 


41 


1S6I  <89  Pl°*  'no°  W 


£        rH    O     CO 
.5         i-l     rH     rH 


OOiHl-^QOtOlOCOiOlO 


TQ6I  's?8  Plo3  W 

•in 


i!3        OS    O5     O5    OJ 


Tj<rtii-|LOt>-CD 
OOOOOO 


OOOOOOOOS 


(M 
OS 


0OOJOSO5O5OiOOO 


^ 
O 


OOO5O5OJ 


'6T6I  ' 


eO  Tt^Oi 


i-ijoO 

O5 


KJOO 

CJ 


•LWl  'Si 


•iT6T  'Si  'Aip 

•BJ  4-ptiH  =y  'i»a 


•sg  -josuoo  -U98 
•0  '0  '0 


eot>>v-(OQCOOQt»QOr-<<^l 


•?S6I 


1-fcq  r^N 

»H     O     CO 
Oi    CO    CO 


iO     »H     O 
O    Oi    CO 


•iI6l  'S9 

•ouj  ;y  -I  'a  ' 


•i86T 


COO 
OiH 


OTH 


THr-IOO 


OrH 
OO 


'8861 '« 


^    ^    O     CO 

rH     rH    01     01 


1 


•^cqiococOT^Tji 


io 


Oi—  IC4COrt<»O 

O)     OS     O)    O)    O)     G) 
QOQOOOOOCOQO 


CDt^OO 

O     O     O 
C3iO5Oi 


42 


•gg  -3  -uoo 


HOW  MONEY  IS  MADE 


- 
00<MiHi-l(Mr-l"«^t-.tO«O-*C^COiQOOOOCOCl 


7,661  '« 

gnipijejj 


COCOOiOOOO 


CDOr-IOO 
CiOOOi 


OOOO5O 


»O     Tfl     CO     O5 


1-     1^     OS     L»     Cl     CO     <M     >O 


CO     l^ 

OSOO 


'SI6I  's?8 


is|»  Hoc  «H" 
(M     t-   CO     t- 
rH      O    O      O 


•uoo  ^sj 


CC)»  r-^N 

COt-CO 


OOOOOOO 


|  r 

Cr5QOCOr-IClC5l>. 
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Tjo 
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- 

OOtOO-r^^r-t<MTt<(MC5 
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•- 

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OOOOO 


OCOiO«O 
OOOO 


''A  "N 


O5OOO5OO5OO 


OOOOOOi 


lO 
O5 


•JL66T 


OCOi—  IO 


rt<i—  l 


lajao 

-^CO 


OOOOOS 


OJQOCO 


ff  o  #  a.  ^  ^r  Sw  ao  n?  ^  3-  s1 


smorj;  -^g  !y  -uatpj 


I^JOOOOTHCOOOCO 


'Sf  OS'S  ISTU^  'IIOO 


OOOOOOO 


OQOOO 
OGSCi 


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s 


BONDS 


'6861 


-g  -£ 


t-cot- 


iH     O  rH     rJH 


QO    OS     O5     rH     OS 


H«  H1*   H*>   H« 
CO    t>*    CO    O 

rH     0     i-H     10 


CO  CO  ie|(»  Ha  <M 
O  O  O  •*  I-H 
i-l  TH  O5  O5  >H 


'0003  'SS  'out  PI<>2  ps 

'OgiOBJ  Iff  SBX9J, 


H-*  Ha  H1*  H-"*  MM  es]oo  H|*»  Ha  Ha  O    <N    O  (M    C-l 

O'O-^fCSOOTH-^hCOOCOOOOOOOOO  »O 

^cocod<Mcocqeotratrscai-it-iiHO5i-iT-i  to 

CO<M<yirH>HT-lTHT-l(M^tl>OOaaaCO    CO     O5     OO  CO 


'SS  'UOO  !^St 


>n°S 


«HI 

CO 


1861  '§9  -naS 
•irej^j  -uBg  iff  stnoT^g 


•a 


•sg  -uoo  ^si 


Ha  Ha 

lOirai-iTtHco 


a  Ha  M|OO  H*  Ha 

jciiokfaoo 


O^  O>  O5  Oi  O^  C5  Oi  05  O  O  O  ^5  O  O  O  O 
OO  OO  OO  OO  OO  QO  OO  OO  O)  O)  G)  O)  O  O^  O)  O) 


STOCKS 

THEIR  NATURE.—  ADVANTAGE  OF  PREFERRED  STOCKS.-—  THE  NON- 
DIVIDEND  PAYERS. —  HOW  TO  JUDGE  OF  THEIR  VALUE 

THE  purchase  of  a  share  of  stock  is  an  investment  in 
the  business,  exactly  as  though  the  buyer  were  a 
partner  in  the  enterprise.  He  is  in  fact  a  special  part- 
ner to  the  extent  of  the  value  of  his  holdings;  and 
he  is  not  responsible  for  the  debts  of  the  concern  beyond 
the  face  value  of  his  stock. 

The  stocks  of  most  of  the  railroad  companies  and  the 
leading  industrial  concerns  have  a  par  value  of  $100  a 
share.  Perhaps  fifty  American  railroads,  most  of  them 
in  the  State  of  Pennsylvania,  issue  shares  of  $50  each ; 
and  while  the  majority  of  these  lines  are  small  and  ob- 
scure, yet  the  list  includes  several  of  the  great  corpora- 
tions, among  them  the  Pennsylvania,  the  premier  rail- 
road of  the  United  States,  the  Heading,  Lehigh  Valley, 
and  Delaware,  Lackawanna  &  Western,  and,  in  New 
York  State,  the  Harlem  and  the  Long  Island.  Two  or 
three  short  lines  have  $25  shares;  and  Wyoming  has  a 
little  one,  with  $10  shares.  In  the  case  of  the  Grand 
Trunk  of  Canada,  the  shares  have  a  par  value  of  £100 
each  or  $500  in  American  money. 

Mining  shares  are  usually  issued  in  small  nominal  par 
value;  but  such  stocks  are  seldom  listed  or  traded  in  on 
the  New  York  exchange. 

44 


STOCKS  45 

The  $50  or  half  shares,  as  they  are  called,  are  quoted 
in  New  York  on  the  basis  of  $100  a  share.  When  one 
buys  Reading,  for  example,  at  $140,  he  really  acquires 
two  shares  at  $70  each. 

Stocks  of  every  description  can  be  bought  through  any 
regular  banking  house  or  broker,  whether  they  are  traded 
in  on  the  exchange  or  not. 

Stocks  are  divided  into  two  classes,  common  and  pre- 
ferred. The  common  stocks,  when  the  two  classes  are 
issued,  are  entitled  to  all  the  profits  after  fixed  charges 
and  preferred  dividends  are  paid.  Some  of  these  com- 
mon stocks  are  of  very  high  value.  There  are  a  good 
many  however  upon  which  no  dividends  are  paid  at  pre- 
sent and  the  chances  of  any  dividend  are  so  remote,  that 
their  value  resides  mainly  in  the  voting  power. 

Preferred  stocks  have  the  priority  as  to  dividends  and 
usually  as  to  assets,  in  case  of  a  reorganization  of  the 
company.  Those  of  the  railroads  are  as  a  rule  non- 
cumulative,  while  most  of  the  industrials  have  the  cumu- 
lative dividend  feature.  That  is  to  say,  if  the  stock  is  a 
7  per  cent  cumulative  issue,  and  if  the  company  is  unable 
to  pay  the  full  7  per  cent  in  any  year,  the  arrears  of  divi- 
dends must  be  paid  in  full  (in  cash,  stock  or  bonds)  be- 
fore the  common  stock  can  hope  to  share  in  any  distri- 
bution of  profits.  It  was  necessary  in  1905,  to  reorganize 
the  United  States  Leather  Company  entirely,  as  the  Cen- 
tral Leather  Company,  to  provide  for  the  41  per  cent  of 
arrears  of  dividends  and  finance  the  arrears  of  dividends 
on  the  cumulative  preferred  stock.  It  is  desirable  that 
an  investor  should  acquaint  himself  fully  as  to  the  peculiar- 
ities of  a  preferred  stock  before  he  buys  it.  The  non-cumu- 
lative feature  is  held  to  be  favorable  to  the  common  stock. 


46  HOW  MONEY  IS  MADE 

Different  policies  are  in  vogue  as  to  preferred  stocks.  St. 
Paul  has  a  7  per  cent  non-cumulative  preferred ;  and  after 
7  per  cent  has  been  paid  both  on  that  and  the  common 
stock,  then  both  classes  share  equally  in  any  division  of 
profits  over  7  per  cent.  The  preferred  stock  of  the  Rock 
Island  Co.  has  a  right  to  elect  a  majority  of  the  directors. 
The  preferred  of  Interborough-Metropolitan  of  New  York 
has  no  voting  power,  as  long  as  dividends  are  paid. 

The  price  at  which  stocks  can  be  bought  is  quite  an- 
other matter  from  their  par  value.  A  good  4  per  cent 
railroad  stock  is  worth  normally  around  par,  that  is  to 
say  $100  a  share.  It  sells  above  or  below  this  price,  in 
sympathy  with  earnings,  assets,  total  capitalization,  and 
the  rest  of  the  market.  If  earnings  are  first  rate,  if 
dividends  are  entirely  assured,  and  the  general  market 
is  booming,  4  per  cent  railroad  stocks  often  sell  at  from 
$110  to  $130  a  share  or  more.  (Reading  sold  as  high  as 
$164  in  the  Winter  of  1905-6.)  That  is  more  than  true 
investment  worth,  because  at  $130  a  4  per  cent  stock 
pays  only  3^  per  cent  on  the  investment. 

If  earnings  are  falling  off,  if  depression  reigns,  loans 
bring  high  rates  of  interest  and  a  bear  market  is  anni- 
hilating fortunes,  good  4  per  cent  railroad  stocks  can 
sometimes  be  bought  for  $55  to  $85  a  share,  as  witness  the 
prices  of  1903.  At  those  quotations,  such  stocks  would 
yield  from  5  to  7  per  cent  on  the  purchase  money,  and 
they  are  a  bargain,  provided  always  that  the  finances 
of  the  company  are  not  impaired. 

The  5,  6  and  7  per  cent  railroad  stocks  sell,  normally, 
around  125,  150  and  175  a  share,  respectively.  They 
soar  above  those  prices  and  sink  below  them  with  the 
times  and  in  accordance  with  a  wide  variety  of  technical 


STOCKS  47 

conditions.  In  a  bull  market,  they  tend  to  go  above  in- 
vestment value,  and,  in  a  prolonged  bear  market,  much 
below. 

It  is  assumed  that  an  investor  will  confine  his  atten- 
tion entirely  to  standard  stocks,  traded  in  on  the  ex- 
changes. No  others  can  be  bought  promptly  at  ruling 
rates  or  sold  to  advantage.  In  the  multitude  of  shares, 
which  are  listed  on  the  exchange,  which  are  the  ones  de- 
serving of  confidence? 

The  dividend  payers  will  naturally  have  the  prefer- 
ence. It  is  not  every  stock  which  is  in  that  fortunate 
class.  The  Inter-State  Commerce  Commission  reports  in 
1904  show  that,  whereas  the  steam  lines  of  the  United 
States  had  issued  a  total  of  about  $6,400,000,000  of  capital 
stock,  yet  on  more  than  $2,600,000,000  of  the  aggregate 
there  was  not,  and  had  not  been  for  years,  any  annual  dis- 
tribution of  profits.  A  scant  half  of  the  enormous  total 
paid  4  per  cent  or  more.  Among  industrials,  the  common 
stocks  of  a  majority  pay  no  dividends.  Obviously,  no 
security  will  attract  a  conservative  investor,  unless  it 
supplies  him  with  an  income,  and  not  even  then,  if  the 
price  is  too  high. 

As  for  the  non-dividend  payers,  to  buy  them  is  to  enter 
upon  a  speculation.  Whatever  the  future  of  any  such 
stocks  may  be,  the  novice  and  the  man  of  moderate  means 
should  beware  of  them,  except  in  rare  and  specific  cases. 
If  he  has  access  to  an  honest  and  candid  official  of  the 
company,  a  banker  connected  with  the  property  or  any 
other  source  of  trustworthy  information  and  is  assured 
that  earnings  are  large  and  a  dividend  will  be  voted  at  an 
early  date,  the  purchase  of  such  a  stock  while  it  is  cheap 
may  be  justifiable. 


48  HOW  MONEY  IS  MADE 

No  one  can  deny  that  a  few  non-dividend  payers  have 
enriched  their  holders.  American  Smelting,  common, 
rose  with  its  earnings  from  $36%  in  1903  to  $174  a  share 
in  1906.  Reading  rose  from  $37%  in  1903  to  $164  in 
1906.  But  a  man  with  a  moderate  amount  of  money  to 
invest  should  resolutely  turn  his  back  on  stocks  which  do 
not  afford  him  a  dividend  from  the  start.  Neither  of 
the  two  stocks  above  referred  to  attained  their  recent 
extremely  high  prices,  until  long  after  they  had  been 
placed  on  a  dividend  basis,  and  gave  a  promise  of  even 
larger  payments. 

In  selecting  a  stock  for  purchase,  an  investor  must  aim 
to  guard  the  safety  of  his  principal,  first  of  all,  and  next 
consider  the  certainty  and  amount  of  the  income.  These 
are  the  vital  factors.  A  man  should  especially  avoid 
being  swept  away  from  the  moorings  of  common  sense 
by  the  bullish  furor,  which  reigns  among  all  classes  of 
our  people  at  intervals.  It  is  sometimes  better  to  buy 
a  sound  stock  and  secure  a  moderate  income  than,  to 
strive  for  7  per  cent  and  endanger  the  safety  of  capital. 
It  is  a  saying,  attributed  to  one  of  the  Rothschilds,  that 
a  man  must  decide  whether  he  would  prefer  to  sleep  well 
or  eat  well.  If  the  capital  be  safe,  even  though  the  in- 
come be  moderate,  the  investor  will  sleep  well.  If  the 
income  be  large  and  enable  him  to  eat  well,  he  may  have 
to  spend  many  restless  nights  in  consequence  of  a  reduc- 
tion of  income  and  a  shrinkage  of  his  capital,  in  bad 
times. 

A  partner  in  a  private  firm  is  entitled  to  look  at  the 
books.  He  has  a  right  to  know  how  much  money  the  con- 
cern is  making,  or,  if  the  business  is  going  backward,  to 
know  that  fact  also.  No  man  in  his  senses  would  ever 


STOCKS  49 

enter  a  private  firm  without  full  knowledge  of  its  affairs. 
Why  should  he  do  so  in  a  corporation,  without  similar 
knowledge  ?  In  the  case  of  most  railroad  companies,  as  here- 
inbefore intimated,  it  is  perfectly  easy  to  "look  at  the 
books, "  or  in  other  words,  to  obtain  the  reports  of  earnings, 
etc.,  for  examination.  A  few  of  the  more  popular  industrial 
companies  also  issue  statements,  although  some  of  the 
larger  ones  do  not.  If  earnings  are  ample,  even  in  bad 
times,  to  pay  all  fixed  charges  on  the  funded  debt,  all 
taxes  and  cost  of  maintenance,  and  all  dividends,  and 
leave  something  over  for  the  surplus  fund,  the  stock 
must  be  considered  a  safe  investment,  if  bought  when 
the  price  is  low. 

The  preferred  stocks  of  industrial  companies,  and  the 
common  stocks  of  such  strong  concerns  as  American 
Sugar  Itefining  are  so  excellent  with  respect  to  the  in- 
come they  afford,  seldom  less  than  about  7  per  cent,  that 
regret  must  be  felt  at  the  lack  of  regular  reports  of 
earnings  and  assets.  To  buy  some  of  these  stocks  is  to 
leap  in  the  dark.  If  there  could  be  such  governmental 
supervision  as  to  ensure  annual  reports  at  least,  the  pub- 
lic would  be  benefited  greatly;  and  it  is  difficult  to  un- 
derstand why  the  corporations  themselves  would  be  in- 
jured, although,  in  fairness,  it  must  be  said  that  some  of 
the  companies  consider  that  they  would  be. 

Union  Pacific  now  pays  10  per  cent  and  earns  more  than 
14  per  cent  for  the  common  shares,  while  possessing 
assets  of  enormous  value.  The  knowledge  of  this  imparts 
a  high  value  to  the  stock.  Beading  pays  4  per  cent  and 
earns  more  than  10.  St.  Paul  pays  7  per  cent  on  both 
classes  of  its  stock  and  earns  14  for  the  common  stock. 
United  States  Steel,  preferred,  is  another  example  of  a 


50  HOW  MONEY  IS  MADE 

security  paying  an  excellent  dividend,  7  per  cent,  and 
earning  far  in  excess  of  all  charges,  even  in  bad  times. 
The  public  knowledge  of  these  things,  derived  from  the 
minute  and  excellent  reports  of  those  corporations,  has 
never  proved  an  injury  to  the  stocks. 

It  does  not  follow,  however,  because  the  foregoing 
or  any  other  standard  stocks  are  good,  sound  invest- 
ment securities,  that  an  investor  should  go  into  the 
market  at  the  particular  time  when  he  happens  to  have 
money  to  invest  and  buy  at  the  prices  then  ruling.  Men 
of  long  experience  do  not  do  that.  They  keep  their  money 
in  the  bank,  where  it  is  safe,  or  loan  it  out  at  interest, 
and  wait.  There  is  a  time  for  all  things,  and  certainly 
there  is  a  time  to  buy  and  a  time  to  sell.  So  far  as 
safety  of  capital  is  concerned,  the  ideal  is  most  nearly 
attained  by  buying  in  times  of  great  depression,  or  dur- 
ing a  panic,  when  stocks  are  below  their  actual  invest- 
ment worth.  The  margin  of  safety  on  a  purchase  is  then 
the  largest.  It  is  no  time  to  buy  after  a  prolonged  and 
extensive  rise.  A  glance  at  the  prices  of  leading  stocks 
for  the  last  fifteen  years,  on  another  page,  should  teach 
caution  in  the  matter  of  buying. 

Governed  by  the  lessons  of  experience,  the  wise  inves- 
tor waits  patiently  until  he  can  go  in  with  the  certainty 
that  the  prices  will  not  go  much  farther,  if  any,  against 
him,  and  on  the  other  hand,  that  they  are  likely  to  re- 
cover. His  capital  will  then  be  in  no  danger  of  impair- 
ment. This  is  the  one  great  lesson  to  be  learned  by  an 
investor  in  stocks.  He  is  liable  to  incur  some  heart- 
breaking experiences  unless  he  masters  it. 

As  between  a  number  of  stocks,  all  equally  solvent,  and 
all  paying  a  proper  income,  an  investor  will  naturally 


STOCKS  51 

consider  the  future  worth  of  the  properties.  He  would 
do  this  in  any  of  the  ordinary  transactions  of  business 
life.  The  margin  of  safety  is  affected  by  future  worth. 
It  is  on  this  account  that  railroad  stocks  are  generally 
held  to  be  better  investments  than  industrial  shares. 
The  possession  of  coal  and  other  mines  and  lands,  the 
growth  of  population,  the  fertility  of  the  soil  in  regions 
traversed  by  the  lines,  the  ownership  of  valuable  ter- 
minals in  cities,  the  development  of  manufacturing  in- 
terests along  the  routes  of  the  roads,  and  the  improbabil- 
ity of  new  and  serious  competition,  tend  continually  to 
add  to  the  value  of  railroad  properties  in  general.  In 
the  case  of  industrial  concerns,  the  ownership  of  patents, 
the  trend  of  the  times  with  reference  to  such  matters  as 
the  substitution  of  electricity  for  steam  for  motive  power, 
the  control  of  the  sources  of  supply  of  iron  ore  and  oil 
or  other  raw  materials,  and  the  liability  to  disturbance 
through  tariff  or  other  legislation,  must  be  considered. 

Future  worth  is  the  only  consideration  in  the  matter 
of  non-dividend  paying  stocks.  No  one  would  buy  them 
on  an  investment  basis,  and  not  even  as  a  speculation, 
unless  it  were  expected  that  the  properties  they  repre- 
sent had  a  great  if  distant  future.  Many  of  the  common 
stocks  of  the  present  day  are  in  the  position  of  those  of 
a  number  of  railroad  lines  built  in  the  '80s.  The  roads 
in  question  were  constructed  by  men  who  had  confidence 
in  the  country  and  looked  entirely  to  the  future  for  a 
proper  reward  upon  their  investments.  Their  common 
stocks,  long  worthless,  rose  in  value  with  the  settlement 
of  the  country;  and  some  of  them  rank  among  the  gilt- 
edged  securities  of  to-day.  Any  one  who  buys  such  stocks 
would  naturally  do  so,  moderately  and  only  after  patient 


52  HOW  MONEY  IS  MADE 

investigation,  and  he  would  resign  himself  to  the  "long 
pull."  Such  stocks  are  never  to  be  bought  unless  they 
are  depressed  in  price. 

Industrial  stocks  have  come  to  stay.  Some  of  them  have 
been  tried  by  times  of  depression,  have  been  attacked  in 
the  courts  under  the  an ti- trust  laws,  and  subjected  to  the 
strain  of  changes  in  the  tariff  laws.  They  have  survived 
every  adverse  influence.  American  Sugar  Refining  is 
one  of  this  class.  The  regularity  of  their  dividends  and 
the  surplus  profits  which  they  have  earned  justifies  their 
rating  as  good  investments,  if  bought  when  they  are  low. 
The  best  of  the  industrials,  with  a  few  striking  excep- 
tions, are  those  which  do  not  issue  bonds.  If  dividends 
are  cumulative,  so  much  the  better  for  the  stock.  The 
United  States  Steel  stocks  are  in  a  class  by  themselves. 
This  concern  has  issued  bonds  but  has  accumulated  a  sur- 
plus of  about  $100,000,000.  United  States  Steel  pre- 
ferred, may  have  to  weather  other  storms  but  seems 
bound  to  enter  the  investment  class  of  stocks,  owing  to 
its  extensive  control  over  the  beds  of  iron  ore  in  this 
country. 

There  are  enough  good  and  sound  stocks  in  the  general 
lists  of  the  exchanges  to  answer  all  conservative  invest- 
ment demand.  A  prudent  man  will  avoid  those  which 
are  not  listed  and  those  which  are  new  and 
unproved,  no  matter  how  alluring  the  prospectus 
of  the  companies.  When  the  time  comes  to  sell, 
standard  stocks  find  a  prompt  and  satisfactory  market 
at  ruling  quotations.  Those  not  listed  can  generally  be 
sold  only  at  a  sacrifice. 

It  is  sometimes  asserted  that  it  is  the  actual  investor 
who  runs  the  most  risk.  This  is  not  a  fair  statement.  On 


STOCKS  53 

the  contrary,  it  may  truthfully  be  said  that  if  an  in- 
vestor buys  with  judgment,  no  one  runs  less  risk  than  he. 
Under  the  worst  possible  circumstances,  the  owner  of  a 
share  of  stock  risks  only  the  surplus  profits  which  he 
has  put  into  the  investment.  Should  the  company  waste 
its  assets,  or  incur  a  crushing  loss  from  fire,  or,  for  any 
other  reason,  become  so  utterly  bankrupt  that  nothing 
is  left  for  the  stockholders— an  almost  unheard  of  case— 
the  investor  has  lost  merely  the  sum  he  paid  for  the  stock. 
This  would  be  bad  enough.  But,  on  the  other  hand,  if 
he  were  speculating  and  carrying  stocks  on  a  margin, 
or  if  he  were  in  legitimate  business  and  affairs  were 
going  badly,  he  would  risk  not  only  such  surplus  profits 
as  he  has  turned  back  into  the  business  but  also, all,  or  a 
large  part,  of  his  remaining  capital.  Wall  Street  and  the 
field  of  legitimate  enterprise  both  supply  a  long  list  of 
insolvencies  every  year.  The  number  now  ranges  be- 
tween 10,000  and  12,000  annually.  In  the  throng  one 
looks  in  vain  for  the  names  of  conservative  actual  invest- 
ors in  stocks. 

Men  of  large  means  do  not,  as  a  rule,  buy  extensively 
into  the  stocks  of  any  company,  unless  they  expect  to  or 
already  take  part  in  the  management.  An  active  part  in 
the  direction  is,  of  course,  entirely  beyond  the  small  in- 
vestor; but  when  a  stock  is  low  in  price,  and  it  is  dis- 
covered that  strong  men  are  accumulating  it  on  a  large 
scale,  for  any  purpose,  this  is  a  sufficient  guarantee  that 
a  purchase  would  be  safe  for  any  one. 

When  Henry  C.  Frick  bought  so  largely  of  Reading, 
and  when  John  D.  Rockefeller,  jr.,  bought  100,000 
shares  of  Union  Pacific  (the  price  being  moderate  in  both 
cases)  in  1904,  a  boom  followed  in  both  of  those  stocks; 


54  HOW  MONEY  IS  MADE 

and  the  subsequent  rise  in  values  showed  how  safe  it 
would  have  been  for  others  to  acquire  Reading  and 
Union  Pacific  at  the  same  time. 

H.  H.  Rogers  was  once  asked  by  a  friend,  who  had 
more*  courage  than  most  men  could  have  summoned  for 
such  a  purpose,  for  a  tip  on  the  stock  market.  Mr. 
Rogers  replied  that  he  might  let  his  friend  in  on  a  deal, 
then  in  progress  in  American  Sugar,  in  which  at  the 
time  they  stood  to  lose  $300,000.  The  friend  did  not 
buy;  but,  if  he  had  stopped  to  reflect,  he  would  have  rea- 
soned that  when  a  man  like  H.  H.  Rogers  had  bought  a 
large  quantity  of  American  Sugar  stock,  he  would  never 
in  the  world  have  let  go  of  it  until  the  purchase  showed 
a  profit.  As  a  matter  of  fact,  the  stock  rose  in  value 
and  the  deal  was  closed  to  the  advantage  of  all  concerned. 

In  a  later  chapter,  suggestions  will  be  made  as  to  the 
time  when,  and  the  circumstances  under  which,  an  in- 
vestor can  buy  stocks,  with  the  assurance  that  his  princi- 
pal will  be  safe  and  that  the  purchase  will  bring  him  an 
increment  on  his  capital.  It  can  do  no  harm  to  insist 
upon  the  point,  that,  unless  a  stock  is  going  to  rise  in 
value,  within  a  few  months  or  a  year  or  so,  no  one  should 
buy  it,  even  as  an  investment. 


VI 

CYCLES  OF  PROSPERITY  AND  DEPRESSION 

THE  FIVE,  TEN  AND  TWENTY  YEAR  PERIODS. — FACTORS  WHICH  IN- 
VARIABLY FORERUN  A  CRISIS.— HOW  STOCKS  FORESHADOW  THE  TURN 
IN  AFFAIRS 

THE  fundamental  point  in  making  money  on  security 
investments  is  to  know  when  to  buy  them  and  when 
to  sell. 

If  the  reader  is  a  man  of  impatient  temperament  and 
must  positively  know  conclusions  first,  without  reference 
to  the  facts  upon  which  they  are  based,  he  can  skip  a  good 
many  pages  of  this  work  and  read  the  last  chapters  first. 
But  if  he  is  a  man  of  sound  mind,  and  if  he  should  refuse, 
as  he  ought  to,  to  take  any  one's  conclusions  without 
knowing  how  he  arrives  at  them,  he  will  be  compelled, 
sooner  or  later,  to  examine  the  premises  upon  which  they 
are  based.  He  might  as  well  proceed,  therefore,  in  an 
orderly  way,  making  sure  that  the  ground  is  firm  under 
his  feet  as  he  advances.  He  will  then  follow  the  evolution 
of  the  writer 's  argument,  in  the  manner  in  which  it  is  here 
set  forth. 

Foremost  among  the  factors,  which  influence  the  price 
of  stocks,  is  the  recurrence  of  cycles  of  prosperity  and  de- 
pression. So  intimate  is  the  relation,  which  exists  between 
the  price  of  stocks  and  bonds  and  the  prevalence  of  good 
or  bad  times,  that  the  subject  is  of  the  first  importance. 
Considerable  space  will  therefore  be  given  to  it  here. 

55 


56  HOW  MONEY  IS  MADE 

If  furnace  fires  are  blazing  and  mills  are  overwhelmed 
with  orders,  if  granaries  are  bursting  with  the  harvests, 
and  railroad  managers  are  at  their  wits'  end  to  find  cars 
for  the  traffic  which  pours  in  from  every  quarter,  then 
profits  are  certain  to  be  large  in  every  vocation,  thousands 
of  men  will  have  surplus  profits  to  invest,  and  Wall 
street  will  respond  to  the  dominating  optimism  of  the 
period  and  bull  the  prices  of  stocks  and  bonds.  When  the 
times  change,  prices  will ;  and  they  will  fall.  Iron  is  said 
to  be  a  barometer  of  the  times.  The  price  of  iron  certainly 
shows  the  actual  state  of  trade.  But  a  genuine  barometer 
is  an  instrument  which  foretells  a  change  in  conditions 
before  the  clouds  have  actually  broken  away  or  gathered 
overhead.  The  most  sensitive  of  all  of  them  is  the  market 
prices  of  stocks  and  bonds. 

Since  the  world  has  become  civilized,  good  and  bad 
times  have  succeeded  each  other  at  more  or  less  regular  in- 
tervals. History  has  repeated  itself  also  in  the  general 
sequence  of  events  from  one  serious  crisis  to  another  and 
in  the  causes  which  bring  them  to  pass. 

Most  writers  on  finance  concur  in  the  statement,  that  the 
interval  from  one  crisis  to  another  is  from  ten  to  twelve 
years  and  that  the  period  is  slowly  but  gradually  lengthen- 
ing. Prof.  W.  S.  Jevons,  of  England,  cites  as  dates  of 
crises  in  the  British  Isles,  the  years  of  1701,  1711,  1721, 
1731/2,  1742,  1752,  1763,  1772/3,  1783,  1793,  1804/5, 
1815,  1825,  1836/7,  1847,  1857,  1866  and  1878.  Prof. 
Jevons  sought  to  connect  these  upheavals  in  business  cir- 
cles with  the  periodicity  of  sun  spots  which  reach  their 
maxima  every  eleven  years.  The  notion  seems  fanciful. 
Human  nature  itself  affords  a  sufficient  explanation  of  all 
the  phenomena  of  these  great  changes  in  the  times,  without 


PROSPERITY  AND  DEPRESSION  57 

referring  them  in  any  way  to  sun  spots  or  the  action  of  the 
planets  in  their  courses. 

A  crisis  invariably  starts  with  money  stringency  and 
unobtrusive  liquidation  in  securities  and  speculative  ven- 
tures leading  up  to  and  bringing  about  the  collapse  of 
some  great  bank  or  business  firm  or  some  startling  ex- 
posure of  fraud,  shaking  public  confidence  at  the  very 
height  of  good  times  and  spreading  consternation  and 
terror  among  all  men,  who  are  committed  to  speculative 
ventures  or  struggling  business  enterprises.  A  panic  fol- 
lows ;  and  the  fright  in  business  circles  causes  a  reaction  in 
trade.  The  first  stage  of  a  cycle  ordinarily  lasts  three  or 
four  years.  Its  characteristic  traits  are  dwindling  trade, 
a  fall  in  the  price  of  securities,  smaller  earnings,  retrench- 
ment in  all  expenses,  lower  wages,  strikes,  the  closing  of 
factories,  discharge  of  surplus  employes,  and  all  the  other 
melancholy  concomitants  of  hard  times.  Dry  goods  and 
other  firms  and  banks  collapse  by  the  hundreds.  Tramps 
throng  the  highways  and  beggars  the  cities.  All  classes 
feel  the  depression.  There  is  commonly  a  temporary  rally 
after  the  first  great  shock  and  a  second  period  of  less 
violent  liquidation. 

Three  or  four  years  succeed,  forming  the  second  stage 
of  the  cycle.  A  better  feeling  gains  ground  among  busi- 
ness men.  Mills  reopen,  merchants  buy  larger  stocks  of 
goods,  labor  is  again  in  demand.  Good  times  are  seen  to 
be  near  at  hand. 

The  third  and  last  stage  of  the  cycle  is  attended  by  a  re- 
newal of  the  conditions,  which  caused  the  last  crisis  and 
will  precipitate  the  next  one.  A  boom  breaks  out,  in  all 
parts  of  the  country.  Goods  bring  higher  prices,  factories 
are  rushed  to  their  full  capacity,  trade  is  active,  stocks 


58  HOW  MONEY  IS  MADE 

rise  to  unheard  of  prices,  and  every  one  makes  money. 
Usually,  there  is  a  great  speculation  in  real  estate.  A 
characteristic  trait  of  this  stage  is  prodigality  in  personal 
expenses.  To  use  the  words  of  Franklin,  the  poor  see  with 
envy  on  every  side  "luxury  of  dress,  luxury  of  equipage, 
luxury  of  the  table."  New  enterprises  are  launched  in 
great  number,  and  the  market  is  burdened  with  enormous 
issues  of  new  securities.  Prosperity  itself  brings  on  fatal 
weakness.  Bank  resources,  ample  at  first,  soon  begin  to 
be  overtaxed.  Bank  loans  run  ahead  of  deposits;  the 
money  supply  is  depleted;  interest  rates  rise;  and  every 
weather  signal  of  finance  points  to  a  coming  collapse, 
which  begins  as  usual  with  long  continued  liquidation. 
The  third  period  fills  out  the  cycle*. 

Every  twenty  years,  the  reaction  seems  to  be  more  severe 
than  the  intermediate  one. 

In  the  United  States,  crises  have  occurred  at  fairly 
regular  intervals,  in  spite  of  the  fact  that  the  exploiting 
of  the  rich  resources  of  a  new  country  has  from  time  to 
time  changed  underlying  conditions  suddenly,  and  of  the 
other  circumstance  that  an  American  stands  less  in  awe  of 
precedent  than  do  the  people  of  Europe.  If,  for  instance, 
it  should  ordinarily  take  five  years  in  Europe  to  pass  from 
the  top  to  the  bottom  of  a  cycle,  attention  would  not  neces- 
sarily be  paid  to  that  rule  here.  A  variety  of  causes 
operate  here  to  interfere  with  the  orderly  succession  of 
events  in  the  middle  period  of  a  cycle.  Crop  failures,  po- 
litical changes,  rate  wars  between  railroads,  laws  on  the 
currency  and  the  trusts,  and  such  matters  as  the  discovery 

*  Roger  W.  Babson,  of  Wellesley  Hills,  Mass.,  divides  a  cycle  into  four  periods : 
One  of  prosperity,  one  of  decline,  a  period  of  depression,  and  a  period  of  improve- 
ment. This  is  really  a  technical  matter.  No  objection  is  seen  to  Mr.  Babson's  four 
periods.  Both  mean  the  same  thing. 


PROSPERITY  AND  DEPRESSION  59 

of  gold  in  California  and  oil  in  Pennsylvania,  have  each 
played  a  part  in  affecting  the  regularity  of  movement. 
Owing  to  the  growing  closeness  of  relations  with  Europe 
and  to  more  settled  conditions  here,  it  is  probable  that,  in 
the  future,  the  United  States  will  pass  from  one  extreme 
of  prosperity  to  the  other  in  a  more  orderly  fashion. 

History  records  the  occurrence  of  crises  in  business  af- 
fairs in  America  in  1791/2,  1814,  1826,  1837.  1848,  1857, 
1864,  1873,  1884,  1893,  1896,  and  1903/y^rief  review  of 
each  is  presented.  The  attention  of  the  reader  is  asked 
particularly  to  a  remarkable  feature  of  the  action  of  the 
stock  market,  with  reference  to  crises.  Almost  invariably, 
the  rise  in  stocks  has  begun  a  year  or  more  in  advance  of 
the  actual  betterment  in  trade  and  manufactures.  The 
advance  has  culminated,  as  a  rule,  from  one  to  three  years 
before  the  actual  crisis  has  arrived ;  and  it  has  often  been 
the  long  decline  in  stocks,  which  has  finally  precipitated 
the  failures  of  banks  and  capitalists  and  brought  on  the 
panic. 

The  rapid  review  of  crises  in  America  which  will  now  be 
presented  does  not  assume  to  be  a  history  of  Wall  street; 
but  each  turning  point  in  affairs  will  be  sketched  with 
sufficient  detail  to  make  the  causes  and  circumstances  clear. 

CRISIS  OF  1791/2 

TRADE  conditions  and  money  stringency  led  to  America's 
first  serious  reaction  and  financial  panic.  Alexander 
Hamilton,  Secretary  of  the  Treasury,  bought  bonds  to  re- 
lieve the  situation.  Confidence  was  restored,  and  order 
brought  out  of  chaos,  largely  through  the  operations  of 
the  first  United  States  Bank,  chartered  in  1791. 


60  HOW  MONEY  IS  MADE 

CEISIS  OF  1814 

A  DECADE  of  prosperity  was  enjoyed  by  the  States  after 
1792 ;  but  the  War  of  1812  and  the  embargo  and  non-in- 
tercourse laws  finally  made  trouble  by  almost  annihilating 
foreign  trade.  From  a  total  volume  of  $246,843,000,  in 
the  fiscal  year  ending  September  30,  1807,  foreign  trade 
had  fallen  steadily  to  $19,892,400  in  1814,  the  smallest  in 
the  whole  history  of  the  republic,  before  or  since.  Ex- 
ports were  less  than  the  pitiful  sum  of  $7,000,000.  Amer- 
ican ships,  long  so  profitable,  were  practically  idle. 

The  country  was  extremely  dependent  upon  foreign 
manufactures  and  these  could  be  had  in  proper  quantity 
only  by  smuggling  through  Canada  and  the  ports  of  New 
England.  The  goods  were  marketed  by  the  merchants  of 
Boston,  to  whom  immense  sums  were  owing  by  the  rest  of 
the  country.  In  1814,  Boston  drew  on  New  York  and 
Philadelphia,  which  were  distributing  cities,  for  the  cash. 
Those  cities  called  in  their  money  from  the  sections  tribu- 
tary to  them.  Specie  was  drawn  from  the  doors  of  banks 
in  New  York  and  Philadelphia,  by  the  wagon  load,  for 
shipment  to  Boston  and  Canada.  Scarcity  of  cash  in  the 
United  States  caused  general  alarm  and  prepared  the  way 
for  the  panic.  The  United  States  Bank  had  disappeared 
in  1811 ;  and  the  State  banks  had  too  limited  a  capital  to 
carry  the  States  through  the  crisis.  They  were  already 
staggering  under  a  heavy  load  of  loans  and  could  do  no 
more. 

When  the  city  of  Washington  was  captured  by  British 
troops,  Aug.  24,  1814,  and  President  Madison  took  refuge 
in  a  Virginia  forest  in  a  heavy  rain,  a  panic  was  the  quick 


PROSPERITY  AND  DEPRESSION  61 

result.  In  Baltimore,  Philadelphia  and  New  York,  the 
banks  suspended  specie  payments,  Aug.  26  and  31  and 
Sept.  1,  respectively.  The  banks  in  New  England  and  a 
few  in  the  West  weathered  the  storm,  but  in  all  the  rest  of 
the  country  suspension  of  specie  payments  was  general. 
Hundreds  of  business  firms  were  wrecked  and  depression 
reigned  throughout  the  country.  Wall  street  was  affected, 
of  course,  but  trading  was  limited  then  to  a  few  varieties 
of  bonds  and  stocks,  and  the  troubles  of  Wall  Street 
figured  to  an  unimportant  extent  in  the  universal 
distress. 

In  England,  inflation  and  depreciation  of  the  paper  cur- 
rency leJ  to  panic  and  reaction  in  1816. 

1819-END  OF  THE  DEPKESSION 

HARD  times  lasted  for  several  years.  It  is  true  that  there 
was  some  rebound  after  the  panic.  Merchants  did  fairly 
well.  New  lands  were  being  rapidly  settled.  A  flood  of 
paper  money  was  poured  out  by  the  State  banks,  and, 
after  April  10,  1816,  by  the  second  United  States  Bank, 
which  gave  a  stimulus  to  enterprise  and  speculation.  But 
the  moment  had  not  arrived  for  a  general  forward  move- 
ment. 

Manufacturers  felt  the  hardship  of  the  times  the  most, 
owing  to  the  lack  of  protection  under  the  tariff  laws. 
Many  went  out  of  business,  especially  the  weavers  of 
woolen  goods,  who  could  not  withstand  the  competition  of 
British  mills,  enormous  quantities  of  whose  productions 
were  dumped  on  the  wharves  of  our  sea-coast  cities  for 
sale  at  auction.  Imports  were  excessive.  The  balance  of 


62  HOW  MONEY  IS  MADE 

trade  ran  heavily  against  the  United  States,  amounting 
in  four  years,  ending  Sept.  30,  1818,  to  more  than  $165,- 
000,000,  a  sum  too  large  to  be  paid  from  the  rich  earnings 
of  American  ships.  It  was  imperative  to  pay  for  the 
goods  and  this  evil  was  soon  made  worse  by  another. 

Paper  money  having  naturally  depreciated,  specie  was 
withdrawn  from  circulation.  To  remedy  this  trouble, 
Government  and  the  banks  united  in  an  effort  to  lessen 
the  volume  of  paper  money  afloat.  State  banks,  whose 
circulating  notes  were  deposited  in  the  United  States  Bank 
and  its  branches,  were  called  upon  to  redeem  them  in 
specie.  Many  of  them  retired  a  part,  or  all,  of  their  bills. 
According  to  A.  S.  Bolles,  the  volume  of  paper  money  was 
contracted  from  $110,000,000  in  1816  to  less  than  $65,- 
000,000  in  1819.  This  drastic  proceeding  brought  on  the 
inevitable  collapse  in  the  business  world,  starting  in  the 
Fall  of  1818.  New  enterprises  were  laid  aside  until  a 
more  convenient  season  and  many  bankruptcies  occurred. 
Edmund  C.  Stedman  calls  this  the  crisis  of  1818.  As  the 
crisis  of  1814  became  acute  through  a  panic,  so  the  depres- 
sion virtually  ended  in  one.  The  trouble  was  caused  by 
the  lack  of  ample  supplies  of  money  at  a  time  of  great  na- 
tional growth. 

CEISIS  OF  1826 

AFTER  drastic  liquidation,  economy  and  curtailment  of  all 
new  commitments  in  business,  courage  revived ;  and  when 
better  times  dawned,  business  men  took  hold  again  with 
characteristic  American  spirit  and  promptitude. 

A  protective  tariff  enacted  in  1824  inspired  fresh  anima- 
tion in  home  industry.  Imports  were  cut  down,  exports 


PROSPERITY  AND  DEPRESSION  63 

were  larger,  and,  in  fact,  during  the  six  years,  ending 
Sept.  30,  1825,  they  nearly  balanced,  excess  of  imports  be- 
ing only  a  trifle  more  than  $30,000,000.  Money  was  in 
ample  supply. 

Public  works  were  built  on  an  extensive  scale  and  labor 
found  good  employment.  The  new  life  in  every  depart- 
ment of  affairs  led  easily  and  in  the  usual  way  to  specula- 
tion, always  the  bane  of  good  times.  The  country  went 
ahead  too  fast;  and  once  more  the  banks  could  not  meet 
all  demands  for  accommodation.  When  a  reaction  in  trade 
started  in  England,  late  in  1825,  money  stringency  ruled 
here  and  put  a  stop  to  all  new  ventures.  In  1826,  a  crisis 
occurred  in  the  United  States,  with  many  failures,  includ- 
ing the  Franklin  Bank  and  Jacob  Barker.  In  England, 
the  depression  was  fearful. 

1831— END  OF  THE  DEPRESSION 

MODERATE  gold  imports  after  1826  led  to  a  short  revival  of 
confidence.  But  the  trend  was  downward  for  several 
years.  Gen.  Jackson  was  fighting  a  battle  royal  against 
renewal  of  the  charter  of  the  United  States  Bank  and  a 
reduction  of  tariff  duties  was  being  debated  in  Congress. 
In  1831,  a  rush  of  foreign  goods  turned  the  tide  of  gold 
outward.  The  times  were  extremely  difficult  and  enter- 
prise was  at  a  low  ebb.  By  1831,  liquidation  had  ended, 
a  slow  improvement  began,  and  the  turn  had  come. 

CEISIS  OF  1837 

THEN  followed  a  term  of  six  years  of  halcyon  days. 
This  was  the  first  era  of  active  railroad  building ;  and  by 


64  HOW  MONEY  IS  MADE 

1837,  the  twenty-three  miles  of  pioneer  railroad  line  of 
1830  had  grown  to  1,497.  The  demand  for  material  and 
labor  for  these  works  proved  an  immense  advantage  to 
industry. 

General  business  also  steadily  grew  better  and  all  classes 
of  producers  and  traders  enjoyed  a  boom. 

The  Clay  compromise  tariff  of  1833,  while  not  stimulat- 
ing in  its  effects,  ended  the  uncertainty  which  had  pre- 
vailed, at  any  rate;  and  although  duties  were  to  be 
lowered  gradually  until  1842,  no  serious  consequences 
were  felt  for  several  years. 

As  time  rolled  on  without  any  serious  check  to  the  grow- 
ing optimism  of  the  period,  a  vast  variety  of  new  enter- 
prises were  launched,  and  deposit  of  the  surplus  revenues 
in  the  State  banks  aided  in  kindling  the  flames  of  a  wild 
speculation.  Securities  attracted  little  attention,  but  a 
mania  broke  out  for  trading  in  lands,  ships,  agricultural 
products  and  manufactures,  such  as  had  never  before  been 
witnessed  in  this  staid  and  old-fashioned  country.  It  is 
recorded  that  prices  were  paid  for  city  lots,  in  some  cases, 
never  afterward  known.  The  famous  m,orus  multicaulis 
speculation  was  an  incident  of  those  times,  rivalling  the 
historic  tulip  mania  in  Holland.  A  furious  carnival  of 
trading  broke  out  especially  in  Government  lands,  pay- 
ment being  made  for  them  in  State  bank  notes.  That 
which  was  bought  to-day  at  any  price  was  sold  to-morrow 
at  a  profit,  and  exuberant  enthusiasm  prevailed  among  all 
classes. 

While  the  times  were  buoyant  beyond  previous  experi- 
ence, underlying  conditions  were  changing.  Imports  grew 
to  extraordinary  figures  and  the  balance  of  trade  against 
the  United  States  rose  from  $13,601,000  in  1832  to 


PROSPERITY  AND  DEPRESSION  65 

$52,240,000  in  1836.  Gold  was  kept  at  home  by  reason  of 
the  large  earnings  of  American  ships  and  the  investment 
of  foreign  capital  in  American  railroads  and  other  ven- 
tures. Indeed,  a  few  millions  of  gold  were  imported, 
every  year.  But  the  eager  demand  for  money  to  finance 
land  and  every  other  kind  of  ventures  kept  pace  with  in- 
creased money  supplies  and  finally  ran  past  them.  Loans 
expanded  steadily  at  the  banks  and  at  one  time  specie 
holdings  did  not  exceed  7^4  per  cent,  of  the  loans. 

A  great  fire  in  New  York,  Dec.  16,  1835,  inflicted  serious 
loss  on  that  community  and  was  one  influence  tending  to- 
ward the  final  reaction. 

April  10,  1836,  the  second  United  States  Bank  came  to 
a  stormy  end,  so  far  as  its  Government  charter  was  con- 
cerned ;  but  it  went  on  for  a  few  years  under  a  Pennsyl- 
vania charter  and  its  reckless  loans  did  not  improve  the 
general  situation.  Early  in  1836,  credit  was  almost  at  the 
breaking  point. 

October  23,  1836,  a  small  panic  in  Wall  Street  heralded 
the  coming  crisis.  President  Jackson  did  the  rest.  Jan. 
1,  1837,  he  began  to  call  in  from  the  banks  the  nearly 
$37,500,000  of  the  surplus  revenue  on  deposit  among  them 
for  distribution  to  the  State  treasuries.  By  April  1,  half 
of  the  amount  had  been  paid  in,  but  to  meet  the  payments 
the  banks  were  obliged  to  contract  loans.  The  country 
was  on  the  brink  of  disaster. 

May  10,  1837,  a  frightful  panic  broke  out  in  the 
financial  world  and  all  the  banks  suspended  specie  pay- 
ments. Prices  of  stocks,  lands  and  goods  fell  in  a  twink- 
ling and  fortunes  vanished  in  a  day.  Extensive  liquida- 
tion took  place ;  and  there  were  over  300  failures  in  con- 
sequence of  the  crash.  In  New  York,  J.  L.  &  S.  Josephs, 


66  HOW  MONEY  IS  MADE 

agents  for  the  Rothschilds,  and,  in  Philadelphia,  the 
United  States  Bank,  went  down  among  others.  The  dis- 
tress was  caused,  in  a  measure,  and  was  aggravated,  by  a 
partial  failure  of  the  crops,  high  prices  for  grain  and 
necessary  imports  of  breadstuffs.  A  shortage  in  the 
annual  contribution  to  the  wealth  of  the  country  from  the 
wheat  and  corn  fields  is  never  a  greater  calamity  than 
when  affairs  are  trembling  in  the  balance. 

The  crisis  of  1837  is  generally  regarded  as  a  "land 
panic. ' '  The  prostration  in  trade  lasted  for  several  years. 
The  bank  crisis  in  the  United  States  proved  disastrous  also 
to  England.  Insane  speculation  had  been  in  progress 
there,  precisely  as  here,  and  was  ended  in  1837  by  panic, 
reaction  and  commercial  distress. 


1843— END  OF  THE  DEPRESSION 

THE  turn  upward  came  in  1843,  partly  through  the  favor- 
able nature  of  the  new  tariff  of  1842  and  hand  in  hand 
with  an  enormous  decline  in  imports.  In  1843,  foreign 
commerce  yielded  a  net  balance  of  $40,392,000  in  favor  of 
the  United  States,  much  the  best  showing  in  the  history  of 
the  country  up  to  that  time.  For  fifty-three  years  pre- 
viously, there  had  been  a  balance  in  favor  of  the  United 
States  ten  times  only — 1840  having  been  the  best  year, 
when  excess  of  exports  was  $25,410,000.  In  all  vocations, 
depression  had  been  severe.  Railroad  building  was  a  good 
barometer  and  had  fallen  off  from  416  miles  of  new  line 
in  1838  to  159  miles  in  1843.  Similar  dullness  existed  in 
all  other  branches  of  enterprise.  By  1843,  liquidation  had 
been  completed. 


PROSPERITY  AND  DEPRESSION  67 

CRISIS  OF  1848 

WHEN  hope  finally  revived,  men  of  ability  gradually 
found  courage  to  embark  once  more  in  the  work  of  de- 
velopment. Factories  and  mills  began  to  experience  a  bet- 
ter demand  for  their  products.  Pig  iron  making  is  always 
an  indication  of  conditions,  and  this  trade  flourished  in 
particular,  the  output  rising  from  215,000  gross  tons  in 
1842  to  800,000  tons  in  1848.  Trade  sprang  up  and  profits 
were  large.  Railroad  building  was  resumed  and  went  for- 
ward with  a  rush.  Good  times  soon  reached  every  city  and 
settlement ;  and  both  capital  and  labor  found  full  employ- 
ment and  reaped  a  rich  reward  therefrom. 

The  War  with  Mexico  had  little  effect,  but  the  seeds  of 
trouble  were  planted  when  Congress  adopted  in  1846  a 
tariff  for  revenue  only.  Industrial  plants  were  small  in 
that  era  and  machinery  was  crude;  and  the  makers  of 
iron,  steel,  textiles  and  other  goods  could  not  withstand 
the  competition  of  the  great  and  more  advanced  factories 
in  Europe,  without  genuine  protection.  A  large  excess  of 
imports  soon  appeared  in  our  foreign  trade  and  gold  was 
drawn  from  the  banks  and  sent  abroad  to  pay  for  the 
goods. 

The  activity  of  business  had  once  more  overburdened 
the  banks  with  loans  and  a  loss  of  specie  made  trouble. 
Matters  were  in  shape  for  a  reaction. 

In  1847,  a  great  crisis  arose  in  Europe,  due  to  inflated 
credits,  fraudulent  stock  companies  and  a  frenzy  of  specu- 
lation. The  reaction  extended  to  the  United  States,  in- 
vaded every  part  of  the  country  and  caused  a  halt  and 
severe  liquidation. 


68  HOW  MONEY  IS  MADE 

1851— END  OF  THE  DEPEESSION 

THE  discovery  of  gold  in  California  by  Marshall  brought 
about  improved  sentiment,  although  not  at  once.  Thou- 
sands of  Americans  went  wild  over  the  prospect  of  sudden 
fortunes,  however,  and  rushed  to  the  Pacific  coast  over- 
land, across  the  isthmus  and  around  Cape  Horn.  Mer- 
chants and  ships  followed  to  supply  their  needs.  When  it 
became  evident  finally  that  the  mines  were  likely  to 
supply  fresh  capital  for  business  operations,  railroad 
building  was  resumed.  In  a  few  years,  California  was 
actually  sending  $40,000,000  of  gold  per  annum  to  the 
East.  Whatever  there  was  of  doubt  in  the  business  situa- 
tion was  finally  cleared  away  by  a  small  panic  in  stocks, 
Aug.  13,  1851,  as  a  result  of  a  break  in  Erie  from  $90  a 
share  to  $68%.  The  smash  was  soon  succeeded  by  a 
genuine  revival. 

CEISIS  OF  1857 

A  BOOM  in  business  broke  out  soon  after  1851,  in  spite  of 
the  injury  to  manufactures  by  the  low  tariff.  Trade  had 
grown  with  rapid  strides  to  keep  pace  with  settlement  of 
the  West  and  the  Pacific  coast.  Shipping  had  reaped  a 
rich  harvest  in  the  traffic  of  the  Atlantic  during  the 
Crimean  War,  1854/5,  and  the  finest  clippers  in  the  world 
had  been  built  for  the  trade  to  California  and  often  paid 
for  themselves  in  one  trip.  Owners  of  merchantmen 
added  enormously  to  their  fleets  in  that  prosperous  period  ; 
and  ship  carpenters  were  among  the  best  paid  of  American 
workmen. 


PEOSPERITY  AND  DEPRESSION  69 

The  construction  of  new  railroads  was  in  full  swing  be- 
tween all  important  cities  and  the  miles  of  new  line  put 
into  operation  annually  had  grown  from  less  than  1,700  in 
1850  to  3,642  miles  in  1856.  What  this  meant  for  the  iron 
and  steel  industry  hardly  needs  explanation. 

Good  times  were  universal.  Iron,  dry  goods  and  all 
other  commodities  brought  high  prices.  Wealth  was  ad- 
vancing. European  investors  looked  with  favor  on  Amer- 
ican securities.  Every  one  was  making  money. 

Wall  Street  discounted  the  good  times  in  its  chronic 
manner.  An  immense  issue  of  new  securities  was  finding 
its  way  into  the  stock  exchanges  and  an  active  speculation 
in  them  was  being  conducted.  Rich  men  were  already 
engaged  in  the  pursuit  of  greater  wealth  by  watering 
stocks;  and  an  increase  of  the  capital  of  Erie  from 
$3,000,000  to  $38,000,000  was  only  one  of  the  financial 
incidents  of  the  period. 

With  reference  to  securities,  the  top  of  the  boom  was 
touched  in  December,  1856,  some  time  before  the  actual 
crisis.  Dec.  5th,  the  rise  in  prices  caused  the  failure  of 
Jacob  Little,  who  had  been  short  of  Erie  more  than 
100,000  shares.  The  reaction  which  ensued  might  have 
ended  in  such  a  moderate  downward  turn  as  is  usual  in  a 
bull  market,  were  it  not  for  changes  in  the  credit  situation, 
which  the  excited  speculation  of  1856  had  done  much  to 
promote. 

Foreign  trade  had  run  steadily  against  the  United 
States  on  account  of  the  low  tariff,  and  the  yet  lower  tar- 
iff, then  under  discussion  and  finally  enacted  March  3, 
1857,  promised  an  aggravation  of  the  trouble.  Investment 
of  European  money  here,  California  gold  and  the  earnings 
of  the  merchant  marine  did  not  offset  the  demands  of 


70  HOW  MONEY  IS  MADE 

foreign  merchants  upon  our  specie  supply;  and  net  ex- 
ports of  gold  ran  all  the  way  from  $23,015,500  in  1853  to 
$58,578,000  in  the  fiscal  year  of  1857. 

Scarcity  of  cash  soon  made  itself  manifest,  and  when 
cash  holdings  had  fallen  to  about  SVa  per  cent  of  the  loans, 
it  was  apparent  that  no  more  money  could  be  placed  at  the 
command  either  of  the  mercantile  community  or  of  specu- 
lators. 

There  was  a  trifling  improvement  in  stocks  in  January, 
1857,  but  the  high  prices  for  railroad  securities,  iron  and 
goods  of  1856  were  not  repeated  until  long  afterward. 

In  January,  1857,  liquidation  set  in ;  and  falling  prices 
were  recorded  for  months.  The  tension  in  the  financial 
world  soon  reached  the  snapping  point.  Aug.  24,  1857, 
the  Ohio  Life  Insurance  &  Trust  Company  succumbed 
under  the  strain  of  reckless  loans,  official  wrong  doing  and 
the  stringency  in  money;  and  the  crisis  had  arrived. 
Wall  Street  should  not  have  been,  but  was,  taken  by  sur- 
prise; and  that  busy  center  has  seldom  witnessed  scenes 
of  greater  excitment  than  prevailed  during  the  panic. 
In  New  York,  loans  had  been  in  excess  of  deposits  for 
some  time,  and  while  that  was  not  an  unfamiliar  pheno- 
menon in  those  days  of  moderate  banking  resources,  and 
while  a  reaction  in  stocks  was  inevitable  from  all  the  cir- 
cumstances of  the  case,  the  crash  would  not  have  been  so 
disastrous  had  not  a  multitude  of  intelligent  men  fallen 
into  a  senseless  panic  and  by  their  precipitate  action  de- 
stroyed their  own  fortunes  and  those  of  others.  A  panic 
is  always  unreasoning,  however,  and  there  is  this  to  be 
said  in  justification  of  the  fright,  which  swept  the  busi- 
ness world,  that  the  banks  had  reached  the  limit  of  their 
ability  to  finance  merchants  and  speculators;  and  the 
smash  was  promoted  by  a  coterie  of  speculators,  who  had 


PROSPERITY  AND  DEPRESSION  71 

foreseen  trouble  and  gone  short  of  stocks  and  whose 
profits  were  dependent  upon  exciting  a  frenzy  of  alarm. 
From  the  first  of  the  year  to  October,  good  stocks  dropped 
between  $40  and  $60  a  share.  Scores  of  business  men 
were  ruined  by  the  reaction.  There  were  runs  on  the 
banks  and  in  October,  a  number  of  them  suspended. 
Erie,  Michigan  Southern  and  Illinois  Central  went  into 
the  hands  of  receivers.  Bank  clearings  in  New  York  in 
1857  were  only  about  half  of  the  total  of  the  year  before. 
The  depression  in  business  circles  lasted  practically  for 
four  years.  Stocks  appreciated  in  value,  as  above  noted, 
in  the  early  part  of  1857,  but  after  that,  there  was  liquida- 
tion until  1858. 

1861— END  OF  THE  EE ACTION 

DULLNESS  reigned  in  many  important  fields  of  enterprise 
after  the  terrible  panic  of  1857.  All  new  work  was 
stopped  and  falling  prices  and  stagnation  were  experi- 
enced throughout  the  country.  Iron  fell  more  than  $9  a 
ton  from  1856  to  1861.  Railroad  building  had  received  a 
staggering  blow  and  fell  from  3,642  miles  of  new  line  in 
1856  to  651  miles  in  1861.  There  was  less  demand  for 
the  output  of  the  textile  mills  and  thousands  of  men  were 
out  of  work.  Some  small  improvement  appeared  in  1860 
but  it  was  short  lived. 

In  consequence  of  political  troubles,  a  turn  for  the 
worse  occurred  in  May,  1860.  Threats  of  secession  were 
being  made  by  fiery  orators  in  the  South,  if  a  Republican 
President  were  elected  in  the  Fall;  and  this  brought 
about  a  serious  state  of  affairs.  Several  years  of  frugality 
and  careful  management  had  led  to  more  healthy  condi- 
tions, when  the  difficulty  of  making  collections  in  the 


72  HOW  MONEY  IS  MADE 

South  impaired  the  credit  of  many  Northern  merchants. 
President  Lincoln  was  elected  in  November,  1860,  and  the 
situation  then  became  acute.  Stocks  fell  from  $7  to  $16 
a  share  in  a  month's  time.  For  the  first  time  in  its  history, 
the  New  York  Clearing  House  was  forced  to  issue  loan 
certificates,  Nov.  23,  1860,  to  the  amount  of  $7,375,000,  to 
carry  the  banks  through  the  monetary  stringency. 

After  a  rally  in  December  from  the  low  prices  of  1860, 
stocks  dropped  until  April,  1861,  when  there  was  a  sudden 
semi-panic,  caused  by  the  firing  on  Fort  Sumter  and  the 
outbreak  of  hostilities.  From  the  low  prices,  then  made, 
stocks  rallied  for  three  years. 

A  powerful  influence  in  favor  of  the  improvement 
which  then  set  in  was  the  Morrill  protective  tariff,  enacted 
March  2,  1861.  Another  was  the  new  source  of  wealth, 
discovered  in  Pennsylvania,  in  the  form  of  petroleum. 

A  second  issue  of  loan  certificates,  amounting  to  $22,- 
585,000,  was  made  by  the  New  York  Clearing  House, 
beginning  September  19,  1861,  and  this  carried  the  banks 
through  to  better  times,  in  spite  of  the  general  suspension 
of  specie  payments,  Dec.  28,  1861. 


CEISIS  OF  1864 

EVENTS  moved  swiftly  during  the  Civil  War.  The  forma- 
tion of  a  large  army  in  the  North  and  its  march  to  the 
South  created  a  demand  for  supplies  and  breadstuffs ;  and 
the  shipment  of  troops  and  munitions  to  different  parts  of 
the  country  added  to  railroad  earnings. 

A  strong  impulse  had  been  given  to  manufactures  by 
the  Morrill  tariff  and  the  requirements  of  the  army;  and 


PROSPERITY  AND  DEPRESSION  73 

hundreds  of  tons  of  pig  iron,  which  had  been 
stacked  in  the  yards  of  the  furnaces,  for  years,  were 
bought  by  the  mills  at  prices  which  dazzled  the  mind  and 
enriched  hundreds  of  men.  Pig  iron  rose  $55  and  $60  a 
ton  from  1861  to  the  Summer  of  1864.  All  other  com- 
modities sold  at  high  prices.  In  1862,  a  great  bull  market 
in  stocks  began  and  prices  rose  excitedly,  with  scarcely  a 
halt  the  whole  year. 

An  effective  cause  in  this  wild  whirl  upward  in  prices 
was  the  issue  of  $431,000,000  of  greenbacks  by  the  Govern- 
ment and  the  expansion  of  paper  money  circulation  from 
$207,000,000  in  1860  to  $833,719,000  in  1864. 

Trade  was  extremely  active.  Wages  were  high,  as 
might  have  been  expected  after  a  legion  of  young  men 
had  left  the  farms  and  workshops  and  gone  away  to  the 
front.  Every  one  who  had  not  shouldered  a  rifle  to  fight 
the  battles  of  his  country  made  money,  as  never  before  in 
his  life.  In  Wall  Street,  in  manufactures,  army  contracts 
and  trade,  fortunes  rolled  in  upon  thousands  of  men ;  and 
money  was  spent  with  open  handed  prodigality. 

Speculation  required  the  use  of  such  unheard  of  sums 
of  cash,  that  the  banks  in  New  York  were  forced,  for  the 
third  time,  to  resort  through  the  Clearing  House  to  loan 
certificates,  $11,471,000  being  issued,  dating  from  No- 
vember 6,  1863,  to  relieve  the  strain  on  credit. 

In  the  Spring  and  Summer  of  1864,  stocks  were  bulled 
to  extraordinary  prices.  Top  of  the  boom  was  actually 
reached  in  April,  although  a  few  securities  went  higher 
in  June.  Everything  on  the  list  was  from  $70  to  $80  a 
share  higher  than  in  April,  1861,  and  the  speculative 
favorites  from  $100  to  $189  a  share.  Delaware  &  Hudson 
had  felt  the  enormous  demand  for  anthracite  coal  and  was 


74  HOW  MONEY  IS  MADE 

manipulated  to  $254  a  share.  Erie  for  the  same  reason 
rose  to  $126  and  Beading  to  $165.  Those  prices  have 
never  been  seen  since  in  the  more  than  forty  years  which 
have  now  elapsed.  In  June,  Harlem  was  cornered  by 
Commodore  Vanderbilt  and  went  to  $285  (a  price,  singu- 
larly enough,  the  same  to  which  gold  was  forced  in  July, 
the  highest  quotation  for  the  metal) .  Harlem  went  off  the 
list  of  the  stock  exchange  for  several  years  and  did  not  sell 
at  $285  again  until  1896.  Michigan  Central  touched  $157 
and  ever  thereafter  until  1891  ranged  below  that  figure. 
In  looking  over  the  record  of  1864,  one  finds  a  number 
of  other  stocks,  which  sold  at  prices  not  again  equalled 
for  a  whole  business  generation.  As  for  the  market,  as  a 
whole,  taking  the  average  of  the  broad  trading  stocks,  it 
has  required  forty  years  to  reach  once  more  the  high  level 
of  1864. 

The  speculative  revel  went  madly  on,  even  while  the 
money  market  was  working  into  a  dangerous  position  and 
when  every  cautionary  signal  of  finance  pointed  to  a  cer- 
tain, early  and  frightful  collapse.  Grim  and  relentless 
war  was  raging  in  all  the  border  States,  pain  and  sorrow 
had  entered  thousands  of  homes,  the  public  debt  was  run- 
ning up  into  the  billions.  But  swept  away  by  the  wild 
enthusiasm  of  the  times,  speculators  and  business  men  be- 
lieved the  boom  would  last  forever. 

Paper  money  inflation  had  been  steadily  expelling  gold 
from  the  United  States;  and  net  exports  of  the  precious 
metal  during  the  fiscal  year  of  1864  were  $89,484,800,  the 
heaviest  in  recollection.  Foreign  trade  was  running 
strongly  in  favor  of  Europe;  and  an  adverse  balance  of 
$157,600,000  was  rolled  up  against  us  in  1864,  which  also 
broke  all  previous  records.  Money  worked  close  again,  as 


PROSPERITY  AND  DEPRESSION  75 

was  natural ;  and  a  fourth  issue  of  loan  certificates  was  re- 
sorted to,  in  New  York,  dating  from  March  7,  1864, 
amounting  to  $17,728,000. 

When  the  break  in  Wall  Street  finally  came,  the  im- 
mediate cause  was  a  reaction  in  Fort  Wayne  stock.  That 
security  had  been  bulled  in  the  interest  of  Anthony  W. 
Morse  from  $82%  in  January  to  $152%  in  April,  and,  after 
the  failure  of  Mr.  Morse,  April  18th,  it  fell  suddenly,  de- 
clining to  $47%  by  May.  The  pools  were  taken  aback  by 
this  performance;  and  while  they  did  not  relax  their  ef- 
forts on  the  bull  side  for  a  month  or  two,  yet  manipulation 
was  no  longer  effectual,  and  a  bear  market  set  in  during 
June,  which  lasted  for  several  years.  More  than  one 
cause  contributed  to  the  result,  but  the  excessive  loans 
at  the  New  York  banks,  and  the  high  premium  on  gold, 
were  two  of  the  most  important.  The  scarcity  and  high 
price  of  gold,  then  of  almost  more  consequence  than  high 
rates  of  interest  on  money,  combined  with  other  adverse 
influences,  caused  a  semi-panic  in  the  Fall,  and  stocks  fell 
violently  until  well  along  in  October.  After  a  moderate 
rally,  they  then  went  lower;  and  by  the  Spring  of  1865, 
leading  stocks  had  declined  from  about  $40  to  $80  a  share. 
Delaware  &  Hudson  had  fallen  $121. 

Heavy  losses  were  incurred  by  hundreds  of  speculators ; 
and  the  reaction  extended  to  the  country  at  large. 


1867— LOW  POINT  OF  THE  DEPRESSION 

AFTER  the  passionate  excitement  and  reckless  speculation 
of  the  Civil  War  period,  calm  ensued  for  two  or  three 
years.  The  country  had  been  exhausted  by  the  long  and 


76  HOW  MONEY  IS  MADE 

cruel  conflict ;  and  the  financial  debauch  was  over  for  the 
moment.  President  Lincoln  had  been  assassinated ;  and  a 
million  of  men  had  gone  back  from  the  armies  in  the  field 
to  their  old  homes  or  to  new  ones  in  the  West.  Iron  and 
other  manufactures  had  been  depressed  by  a  sudden  end- 
ing of  the  demand  for  war  ships,  arms,  munitions  and 
supplies.  Contraction  of  the  paper  circulation  was  in 
progress,  the  volume  being  reduced  from  $983,300,000  in 
1865  to  $827,000,000  in  1868.  A  brief  period  of  rest  and 
adjustment  to  new  conditions  was  imperative. 

Stocks  rallied  to  some  extent  in  1865,  as  usual  after  an 
abrupt  decline,  but  underlying  conditions  were  not  favor- 
able to  an  immediate  resumption  of  the  bull  market.  Im- 
ports were  heavy ;  and  in  the  fiscal  year  of  1866,  gold  went 
abroad  in  the  amount  of  $63,001,000,  next  to  the  most 
serious  outward  movement  on  reccrd.  Stocks  fell  off 
again  in  the  Spring  of  1866.  May  llth,  1866,  Overend, 
Gurney  &  Co.,  of  London,  failed,  precipitating  a  sudden 
panic  at  that  center  and  a  depression,  which  had  no  little 
sympathetic  effect  here.  Writers  refer  to  this  chapter  of 
finance  as  the  Crisis  of  1866.  Practically,  it  marked  the 
turning  point  here.  After  a  rally,  and  one  more  reaction 
in  the  Spring  of  1867,  the  trouble  was  ended.  Twenty 
selected  stocks  had  fallen  an  average  of  $58  a  share  from 
the  high  prices  of  1864,  and  individual  stocks  had  declined 
from  about  $40  to  $130  a  share.  The  collapse  in  England 
caused  two  thirds  of  the  speculative  stock  companies  there 
to  go  out  of  business. 

In  1867,  large  fortunes  were  brought  to  the  support  of 
stocks  and  general  business  and  better  times  prevailed 
for  several  years,  although  the  banks  were  not  yet  in  a 
position  to  finance  a  sustained  bull  market  in  stocks. 


PROSPERITY  AND  DEPRESSION  77 

Every  burst  of  business  activity  and  the  requirements  of 
the  railroad  companies  called  for  every  dollar  the  banks 
could  loan  and  the  burden  was  borne  with  difficulty. 

CEISIS  OF  1873 

IMPROVEMENT,  once  begun,  went  forward  rapidly.  Rail- 
road building,  which  had  fallen  to  738  miles  of  new  line  in 
1864,  grew  to  7,379  miles  in  1871.  The  protective  tariff 
was  working  out  good  results ;  and  while  stimulating  pro- 
duction, it  had  given  the  country  the  advantage  of 
moderate  prices  for  iron  and  other  goods.  A  genuine 
boom  soon  manifested  itself,  especially  in  iron  and  steel. 
Mills  and  shops  of  every  description  were  rushed  with 
orders.  No  workman  was  denied  who  sought  a  market  for 
his  services.  New  lands  were  being  settled,  partly  by 
veterans  of  the  war.  A  number  of  fortunate  crop  years 
added  to  the  wealth  of  the  States.  In  the  fiscal  year  of 
1873,  exports  had  passed  $522,000,000,  which  was  more 
than  thrice  the  amount  of  the  last  year  of  the  Civil  War 
and  the  greatest  business  the  country  had  ever  done  up  to 
that  time. 

The  rebound  in  stocks  from  the  low  levels  of  1866  and 
1867  was  vigorous  and  ran  on  unchecked  until  the  Summer 
of  1869.  A  few  stocks  went  higher  in  1871  and  some 
others  in  1872.  The  real  culmination  of  the  bull  market 
was  in  1869,  when  high  priced  railroad  shares  were  from 
about  $30  to  about  $100  higher  than  during  the  depres- 
sion. The  coal  shares  were  exceptions;  they  hung  heavy 
and  some  of  them  were  actually  lower.  The  period  from 
1869  to  1872  was  one  of  distribution.  General  prosperity 


78  HOW  MONEY  IS  MADE 

was  unchecked  until  1873  but  stock  speculation  drooped. 
A  variety  of  untoward  events  occurred. 

Black  Friday  panic,  September  24,  1869,  caused  by  a 
corner  in  gold,  sent  stocks  tumbling,  led  by  a  decline  in 
gold  from  $162^  to  $133.  Clearings  at  the  Gold  Exchange 
Bank  were  so  entangled  and  confused  that  the  bank  went 
into  the  hands  of  a  receiver  and  its  doors  were  closed  for 
several  days.  Many  failures  occurred  in  Wall  Street  and 
hundreds  of  business  firms  were  crippled  or  obliged  to 
wind  up  their  affairs. 

The  Chicago  fire,  October  9,  1871,  and  the  Boston  fire, 
Nov.  11,  1872,  each  caused  a  heavy  waste  of  invested 
capital  and  a  break  in  stocks. 

In  spite  of  all  disasters,  the  stock  market  was  measur- 
ably strong  until  1872.  Not  only  were  powerful  cliques 
energetic  in  sustaining  prices  until  they  could  sell  their 
holdings ;  but  extra  dividends  were  voted  by  railroads,  the 
most  unheard  of  watering  of  stocks  was  announced  from 
time  to  time,  and  a  few  important  consolidations  were 
effected,  like  that  of  New  York  Central  with  Hudson 
River,  all  contributing  to  awaken  hopes  of  higher  prices 
yet  to  come.  Rivalry  in  the  buying  of  shares  'for  control 
added  to  the  excitement.  A  number  of  desperate  battles 
were  fought  in  Wall  Street  between  rival  factions. 
Corners  were  engineered,  one  after  another;  and  there 
were  three  on  one  day,  September  17,  1872,  yet  remem- 
bered as  the  "day  of  three  corners." 

While  the  trend  of  stocks  was  downward,  business  re- 
mained in  a  healthy  condition.  Business  men  were  doing 
extremely  well,  crops  were  good,  and  pig  iron  production 
in  1873  rose  to  2,560,900  tons,  so  far  the  high  water  mark 
in  that  industry  in  America,  while  the  price  had  risen  over 
$20  a  ton  by  the  Fall  of  1872. 


PROSPERITY  AND  DEPRESSION  79 

Various  influences  had  come  into  play,  meanwhile,  to 
weaken  the  credit  situation.  Reckless  overtrading  in  Wall 
Street  invariably  adds  to  the  weight  of  other  forces  in  this 
direction.  In  spite  of  enormous  grain  exports,  the  United 
States  had  been  buying  foreign  goods  in  even  greater 
quantity ;  and  gold  had  been  going  to  Europe  at  the  rate 
of  from  $21,000,000  to  $63,000,000  a  year  since  1867. 
Bank  reserves  were  low,  and  scarcity  of  cash  caused  a 
money  flurry  in  September,  1872.  Loans  were  made  at  ^ 
per  cent  a  day  and  2^  per  cent  was  paid  for  carrying 
Erie  stock.  Later  in  the  year,  the  market  was  unsettled 
by  a  break  in  Chicago  &  North  Western.  The  Woodward 
party  had  bought  and  cornered  that  stock,  driving  the 
price  from  $68^  in  October  to  $230  in  November,  but  the 
corner  failed  almost  at  the  moment  of  success  and  the 
stock  broke  to  $81*/2  in  December.  A  semi-panic  ensued, 
with  many  failures.  For  a  short  time,  the  banks  stopped 
the  issue  of  weekly  statements  of  their  condition. 

Early  in  1873,  money  worked  close  again.  Call  loans 
could  not  at  times  be  made  for  less  than  7  per  cent,  with 
%  per  cent  a  day  commission  added.  Bankers  charged  % 
to  1  per  cent  a  day  for  carrying  stocks.  Time  loans  went 
to  12  per  cent.  The  crisis  was  at  hand,  promoted  by  the 
overbuilding  of  railroads. 

The  public,  already  nervous,  was  startled  on  April  26, 
1873,  by  the  failure  of  the  Atlantic  Bank ;  and  then  began 
a  financial  and  commercial  panic,  which  was  due  entirely 
to  the  excesses  of  the  previous  five  years.  The  echoes  and 
consequences  of  a  panic  in  Vienna,  May  9th,  growing  out 
of  reckless  speculation  in  doubtful  securities,  made  matters 
worse  here.  Frantic  selling  of  stocks  began  at  the  New 
York  Stock  Exchange  and  prices  crumbled  away,  week 
after  week,  without  more  than  one  brief  pause  in  the  Fall. 


80  HOW  MONEY  IS  MADE 

September  8,  1873,  the  New  York  Warehouse  Company 
succumbed.  On  the  17th,  the  New  York  Midland  became 
bankrupt  and  Jay  Cooke  &  Co.  failed  on  the  18th.  This 
last  calamity  capped  the  climax.  Fright  and  excitement 
swept  the  whole  country.  In  Wall  Street,  pandemonium 
reigned.  So  terrible  was  the  panic,  that  the  Stock  Ex- 
change took  the  perfectly  unprecedented  action  of  closing 
its  doors  on  the  20th,  not  to  reopen  them  until  the  30th. 
Time  loans  were  15  to  24  per  cent  in  October  and  call 
money  was  7  per  cent,  with  *4  Per  cent  a  day  added.  For 
the  fifth  time,  the  New  York  Clearing  House  issued  loan 
certificates,  dating  from  September  22,  1873,  in  the  amount 
of  $26,565,000.  With  a  view  to  relieve  the  tension  to  some 
extent,  the  United  States  Treasury  reissued  about  $26,- 
000,000  of  greenbacks,  there  being  slender  warrant  in  the 
law  for  this  action. 

The  smash  in  stock  prices  ended  in  November  and  a 
great  rally  followed.  But  the  financial  storm  had  wrecked 
many  fortunes  and  thrown  a  number  of  banks  and  hun- 
dreds of  business  men  into  bankruptcy,  as  well  an  the 
Northern  Pacific  and  the  New  York,  Chicago  &  St.  Louis 
railroads.  It  is  said  that  seventy-nine  members  of  the 
New  York  Stock  Exchange  failed  during  the  panic.  In 
the  country  at  large,  failures  among  business  men  grew 
more  numerous,  every  year  thereafter,  until  1878,  in- 
clusive. 

The  Credit  Mobilier  investigation  intensified  the  general 
uncertainty. 

1877— END  OF  THE  DEPBESSION 

THE  reaction  in  business  lasted  until  the  latter  part  of 
1876  and  in  some  lines  until  the  Summer  of  1877.  Pig 


PROSPERITY  AND  DEPRESSION  81 

iron  making  fell  off  from  2,560,900  tons  in  1873  to  1,868,- 
900  tons  in  1876 ;  and  there  was  no  important  recuperation 
in  price  until  1878,  when  there  had  been  a  fall  of  about 
$40  a  ton  from  the  high  prices  of  1872.  New  miles  of 
railroad  constructed  dropped  from  7,379  in  1871  to  1,711 
miles  in  1875.  In  all  other  vocations,  dullness,  lower 
prices  and  smaller  profits  were  reported. 

January  14,  1875,  President  Grant  signed  the  bill, 
pledging  the  Government  to  resume  specie  payments,  on 
the  1st  of  January,  1879,  and  while  this  was  a  reassuring 
incident,  its  good  effects  were  not  felt  immediately. 

Men  of  large  means  were  greatly  disturbed  during  this 
period  by  the  so-called  granger  laws  of  several  Western 
States,  which  aimed  a  hard  blow  at  the  railroads  in  the 
interest  of  farmers  and  sought  to  regulate  and  reduce 
freight  rates.  Partly  in  consequence  of  these  laws  and 
also  as  a  sequence  of  the  hard  times  and  loss  of  freights, 
all  agreements  as  to  rates  came  to  an  end  between  rail- 
road and  coal  companies;  and  open  wars  broke  out  be- 
tween several  important  systems.  Slackening  of  traffic 
had  already  impaired  earnings  and  the  damaging  compe- 
tition of  1875  and  1876  cut  them  down  yet  more.  Com- 
modore Vanderbilt  died,  January  4,  1877,  and  a  trunk 
line  agreement  which  he  had  brought  about  a  month  or 
two  before  was  abandoned.  Loss  of  earnings  sent  Central 
of  New  Jersey  into  the  hands  of  a  receiver  in  February; 
and  Reading  was  obliged  to  apply  to  creditors  for  con- 
cessions. 

The  trend  of  the  times  was  so  unmistakably  downward 
in  Wall  Street  in  this  period,  that  a  strong  bear  party 
came  into  existence,  and  its  untiring  attacks  caused  prices 
(after  a  rebound  from  the  bottom  in  1873)  to  reach  a 
lower  level  in  the  Spring  of  1877,  than  for  the  previous 


82  HOW  MONEY  IS  MADE 

twenty  years.  The  last  drive  in  the  month  of  June  ended 
the  reaction  in  the  stock  market.  Taking  the  whole  body 
of  active  stocks,  all  the  gain  since  1861  had  been  wiped 
out;  the  average  was  lower  than  then;  20  selected  stocks 
had  declined  $76  a  share  since  1869  and  individual  stocks 
were  down  from  $14  to  $116  a  share,  the  high  priced  ones 
the  most.  A  change  in  outside  conditions  was  then  ush- 
ered in.  Call  money  was  remarkably  low,  the  trunk  line 
railroads  made  a  new  agreement  in  June,  and  such  evils  as 
prevailed  in  the  business  community  seemed  near  their 
end.  The  turn  had  come.  A  powerful  speculative  com- 
bination was  formed  in  Wall  Street  and  the  buying  of 
stocks  for  a  bull  campaign  began. 

CRISIS  OF  1884 

BETTER  times  trod  upon  the  heels  of  1877.  Confidence  re- 
turned slowly,  indeed,  but  it  did  return;  and  the  tide  of 
prosperity  rose  steadily  until  its  inspiration  had  pene- 
trated every  city  and  hamlet  in  the  country.  The  fertile 
lands  of  the  West  and  South  brought  forth  bountiful 
harvests,  and  ocean  commerce  expanded  under  the 
stimulus  of  good  crops.  The  excess  of  American  exports 
was  only  one  of  the  features  of  this  golden  period  in  our 
affairs,  which  broke  all  records.  During  four  years,  end- 
ing June  30,  1881,  foreign  trade  yielded  an  average 
balance  of  more  than  $230,000,000  per  annum  in  favor  of 
the  United  States,  a  marvel  to  which  our  people  were  not 
accustomed. 

A  number  of  new  railroads  were  required;  building 
broke  out  afresh  and  once  more  surpassed  all  precedent, 
the  miles  of  new  line  rising  from  2,665  in  1878  to  11,569 


PROSPERITY  AND  DEPRESSION  83 

in  1882.  The  transportation  of  materials  for  railroad  con- 
tractors and  a  larger  volume  of  goods  and  grain  led  to  a 
striking  improvement  in  the  earnings  of  all  lines. 

Meanwhile,  mills  and  factories  were  busy,  and  furnaces 
could  hardly  meet  with  promptitude  the  orders  for  metal. 
The  tonnage  of  pig  iron  turned  out  in  1882  was  the 
enormous  total  of  4,623,300,  or  nearly  three  times  the 
record  of  1876.  In  the  sale  of  goods,  merchants  reaped 
large  profits.  Farmers  were  paying  their  debts.  Energy 
pervaded  the  entire  commercial  world.  The  mines  were 
taxed  to  the  utmost  and  the  output  of  coal  was  nearly 
twice  that  of  the  dull  years  which  preceded  the  boom. 

Betterment  in  the  stock  market  was  delayed  by  strikes 
and  riots  at  Pittsburgh  and  elsewhere  in  1877,  but  the  time 
was  ripe  for  a  bull  movement  in  stocks  and  after  a  few 
months  the  bull  party  had  the  situation  under  control. 
Stocks  began  their  rise  in  the  Spring  of  1878.  In  1879, 
men  of  means  awoke  suddenly  to  the  fact  that  railroads 
were  of  value  as  investments  after  all  and  a  marvelous 
buying  of  securities  sprang  up,  which  electrified  the 
financial  world  and  led  to  a  boom  in  prices.  A  powerful 
factor  in  behalf  of  higher  prices  was  the  undoubted  fact, 
that  the  heart-breaking  wreck  and  reconstruction  of 
corporate  finances  had  been  finished  for  the  time  being. 
Rate  wars  had  ceased  and  earnings  were  on  the  upward 
grade.  Money  was  fairly  low,  barring  the  customary  flur- 
ries at  the  planting  and  harvest  seasons;  and  time  loans 
could  be  negotiated  at  an  average  of  4  to  5  per  cent.  As 
soon  as  the  boom  started,  there  was  no  hesitation  on  the 
part  of  investors  and  traders.  Orders  to  buy  poured  into 
every  brokerage  office  in  a  flood;  and  brokers  were  in 
danger  of  being  utterly  swamped  with  business.  Stocks 


84  HOW  MONEY  IS  MADE 

rushed  upward  with  a  whirl  until  November.  In  1880, 
especially,  the  stock  exchanges  were  the  scenes  of  furious 
trading,  such  as  brokers  had  never  witnessed.  Fortunes 
were  made  by  every  one  connected  with  Wall  Street. 
Scarce  a  cloud  flecked  the  sky  for  two  or  three  years,  and 
the  swelling  tide  of  the  boom  rolled  on  practically  un- 
checked until  1881.  A  number  of  striking  railroad  con- 
solidations were  arranged  by  Jay  Gould  and  others.  The 
buying  of  stocks  for  control,  stock  dividends,  rights  on 
new  issues  and  strong  manipulation  by  operators,  pro- 
moted speculation  and  kept  it  at  the  boiling  point.  In 
1880,  stock  dividends  were  declared  to  the  amount  of 
more  than  $40,000,000. 

The  good  times  were  not  allowed  to  pass  without  a  few 
unfortunate  incidents,  however,  among  them  being  a  re- 
ceivership for  Reading,  May  24,  1880,  and  a  strong  specu- 
lative shake  out  in  stocks  in  that  month. 

Activity  in  Wall  Street  and  general  business  circles 
was  exhibited  by  the  circumstance,  that,  throughout  the 
whole  of  1880,  reserves  were  extremely  low  in  the  New 
York  banks.  But  gold  began  to  flow  in  from  Europe  and 
in  the  fiscal  year  of  1881,  all  records  were  broken  by  a  net 
importation  of  $97,000,000  of  that  coin. 

The  boom  in  stocks  culminated  in  May  and  June,  1881. 
Shares  had  then  risen,  in  some  cases  $40  and  in  others 
as  high  as  $120,  averaging  about  $60,  from  the  low  prices 
of  1877.  After  the  shooting  of  President  Garfield,  July 
2,  1881,  stocks  did  not  rally  back  to  the  high  level  of  the 
Spring  in  more  than  a  few  exceptional  instances.  For 
particular  reasons,  a  few  did  go  higher  in  1882. 

A  direct  cause  of  the  halt  was  undoubtedly  the 
enormous  issue  of  new  stocks  and  bonds,  put  forth  as  a 
consequence  of  the  marvelous  increase  in  miles  of  railroad 


PKOSPERITY  AND  DEPRESSION  85 

line  in  operation  and  the  union  of  old  companies.  The 
market  was  overweighted  with  those  securities.  All  were 
pressing  for  sale ;  and  some  of  them  held  out  no  hope  of  an 
income  to  the  owners  for  years  ahead.  Another  source  of 
disturbance  was  a  partial  failure  of  the  wheat  and  corn 
crops  in  1881.  Rate  wars  again  blasted  the  hope  of  larger 
earnings  in  the  latter  half  of  1881;  and  freight  was 
carried  by  the  trunk  lines  from  the  West  to  the  seaboard 
at  rates  which  barely  paid  the  cost  of  transportation.  Ex- 
ports of  American  produce  began  to  fall  off.  Uold  not 
only  ceased  to  come  into  the  country,  but  on  the  other 
hand  went  out. 

Every  effort  was  made  to  neutralize  the  effect  of  less 
favorable  conditions;  and  leading  men,  like  Mr.  Vander- 
bilt  and  Jay  Gould  managed  to  lift  prices  somewhat  in 
1882.  Large  fortunes  were  brought  to  the  support  of  the 
market.  March  13,  1882,  Mr.  Gould  made  his  famous 
exhibit  of  securities  to  a  few  friends,  spreading  out  before 
them  about  $50,000,000  of  stocks  and  offering  to  show 
them  $30,000,000  of  bonds.  No  efforts,  however  spectacu- 
lar, sufficed  to  stay  the  downward  trend  in  Wall  Street. 
In  the  Fall  of  1882,  money  ran  up  to  20  and  25  per  cent, 
and  once  to  30  per  cent,  for  call  loans. 

By  this  time,  the  public  had  become  seriously  alarmed. 
Thousands  of  men  opened  their  eyes  to  the  fact  that  they 
were  loaded  with  stocks  and  bonds,  which  could  not  be 
sold  at  a  profit  and  were  not  worth  keeping  as  invest- 
ments. Liquidation  set  in;  and  this  selling  imposed  a 
burden  upon  the  market  too  heavy  to  be  sustained.  A 
heavy  shrinkage  in  values  took  place;  and  in  the  Fall  of 
1882,  a  number  of  stocks  reached  the  lowest  prices  known 
for  more  than  a  year. 

Confidence  was  greatly  unsettled  by  this  decline;  and 


86  HOW  MONEY  IS  MADE 

although  the  earnings  of  some  of  the  railroads  were  good 
yet  nothing  sufficed  to  stay  the  liquidation. 

New  and  troublesome  factors  came  into  play  in  1883. 
A  revised  tariff  law  of  March  3,  1883,  deranged  the  iron 
and  textile  trades  and  general  business  slackened.  Prices 
of  commodities  fell,  iron  leading  the  way.  Another  of  the 
disturbing  influences  of  the  time  was  the  fact  that  some  of 
the  new  railroads  were  exact  parallels  and  competitors  of 
the  older  systems. 

The  crisis  arrived  in  1884.  In  January  of  that  year, 
Henry  Villard,  and  in  April,  James  R.  Keene  failed.  In 
May,  in  quick  succession,  came  the  suspensions  of  the 
Marine  Bank,  Grant  &  Ward,  and  the  Metropolitan  Bank, 
coupled  with  startling  revelations  of  fraud,  which 
stunned  the  public  mind.  Brokers  and  traders  were  frantic ; 
and  a  panic  took  place,  memorable  not  only  for  its  violence 
but  because  the  prestige  of  Gen.  U.  S.  Grant,  the  idol  of 
the  nation,  was  involved  in  the  ruin  of  Grant  &  Ward. 
First  class  stocks  were  thrown  overboard  and  sacrificed, 
equally  with  the  weak  ones,  and  prices  declined  from  $17 
to  $54  below  the  levels  at  which  they  had  sold  a  few 
months  before.  In  the  midst  of  the  excitement,  May  11, 
1884,  the  New  York  Clearing  House  lent  its  strong  sup- 
port to  the  financial  community  by  a  sixth  issue  of  $24,- 
915,000  of  loan  certificates. 

During  the  latter  part  of  1884,  the  trunk  line  railroads 
again  went  to  war  with  each  other  and  cut  rates  heavily, 
making  matters  worse. 

It  is  to  be  noted  that  the  panic  was  the  direct  outgrowth 
of  three  years  of  declining  prices.  Loss  of  confidence  in 
various  great  magnates  of  finance  had  slowly  driven 
thousands  of  men  out  of  the  stock  markets.  Their  buying 
no  longer  lent  support. 


PROSPERITY  AND  DEPRESSION  87 

1886— END  OF  THE  KEACTION 

BOTTOM  was  touched  in  the  stock  market  in  June,  1884. 
In  three  years,  many  active  stocks  had  fallen  from  $30  to 
$75  a  share  and  Union  Pacific  was  down  $103.  A  few 
stocks  went  lower  in  the  early  part  of  1885  but  the  mar- 
ket at  large  was  then  on  the  road  to  recovery.  Traders 
were  discouraged,  however,  and  sales  on  the  New  York 
Stock  Exchange  ebbed  from  more  than  117,000,000  shares 
in  1881  to  96,000,000  in  1884  and  93,000,000  in  1885. 
Nevertheless,  in  1884,  the  foundations  were  laid  for  a  bull 
market,  lasting  until  1890. 

The  set  back  in  business  was  of  short  duration.  It 
ended  in  1886.  So  brief  and  trivial  was  the  revulsion,  that 
it  might  almost  be  said  there  was  none. 

Liquidation  brought  its  usual  panacea  for  the  woes  of 
Wall  Street  and  the  financial  world,  in  the  form  of  easy 
money.  Call  loans  fluctuated  between  1  and  3  per  cent, 
as  a  rule,  during  the  whole  of  1884  and  1885. 

In  stocks,  there  was  a  good  rally  in  August,  1884,  and 
then  while  business  men  were  taking  breath  and  examin- 
ing the  grounds  for  taking  hold  again,  dullness  and  sag- 
ging prices  prevailed  for  six  months  or  more.  Easy 
money  and  low  rates  of  interest  finally  encouraged  some 
tentative  buying  of  stocks  for  a  rise.  In  June,  1885,  a 
mysterious  buying  of  Vanderbilt  stocks  and  West  Shore 
bonds  began  to  be  noticed,  which  really  foreshadowed  the 
absorption  of  West  Shore  by  the  New  York  Central  and 
the  formation  of  a  new  pool  among  trunk  line  roads  for 
maintenance  of  rates.  A  sharp  advance  in  stocks  took 
place,  running  on  into  November,  and  this  initiated  a 


88  HOW  MONEY  IS  MADE 

sustained  rise,  which  did  not  end  until  the  disastrous 
year  of  1893. 

Wm.  H.  Vanderbilt  died  December  8,  1885,  but  the  ef- 
fect on  stocks  was  limited. 

The  progress  of  good  times  was  interrupted  briefly  in 
1886  by  fierce  strikes  in  New  York,  Chicago  and  elsewhere, 
accented  by  the  bomb  outrage  in  Chicago,  May  4th.  There 
was  also  a  sharp  reaction  on  account  of  agitation  in  favor 
of  the  proposed  Inter-State  Commerce  Commision  bill, 
when  Congress  met  in  December.  Gold  exports  in  1886 
were  not  a  cheerful  feature.  But  underlying  conditions 
had  grown  better.  Magnificent  crops,  fresh  imports  of 
gold,  a  revival  of  railroad  construction,  and  new  life  in 
the  iron  and  coal  trades  inspired  the  public  finally  with 
courage;  and  the  bears  in  Wall  Street  became  uncertain 
of  their  position. 

CRISIS  OF  1893 

IMPROVEMENT  in  the  times  was  aided  by  harmony  among 
the  railroads,  defeat  of  successive  bills  in  Congress  aim- 
ing at  a  lower  tariff,  and  the  concerted  work  of  bankers 
and  financiers. 

In  1887,  there  was  added  to  the  railroad  systems  of  the 
country  12,876  miles  of  new  line ;  and  this  record  has  ever 
since  remained  the  high  water  mark  of  railroad  building 
in  the  United  States. 

The  bull  market  worked  gradually  upward  after  1885. 
In  1887,  a  number  of  sensational  movements  in  stocks  en- 
livened Wall  Street ;  and  Aug.  llth  of  that  year  marked 
the  finish  of  Henry  S.  Ives,  who  failed,  to  the  delight  of 
every  one  else  in  the  financial  community. 

There  were  the  inevitable  set  backs,  peculiar  to  every 


PROSPERITY  AND  DEPRESSION  89 

bull  movement,  no  unfavorable  circumstance  being  al- 
lowed to  pass  without  an  impetuous  drive  at  stocks  by 
men  like  James  R.  Keene,  whose  talents  shone  the  brightest 
in  a  bear  campaign.  In  1888,  St.  Paul  -  passed  its 
dividend,  and  a  sharp  slump  in  prices  resulted.  January 
10,  1889,  J.  P.  Morgan  finally  effected  the  famous  "gentle- 
men 's  agreement ' '  between  trunk  line  officials  as  to  rates ; 
and  there  was  a  good  recovery  in  prices. 

The  bull  market  culminated  with  the  Spring  rise  in 
1890.  A  swarm  of  troubles  then  cropped  up.  A  partial 
failure  of  the  harvests  and  various  corporate  receiverships 
were  among  them.  In  July,  Congress  passed  the  act  for 
monthly  purchase  of  4,500,000  ounces  of  silver  and  re- 
demption of  silver  notes  at  the  Treasury  in  gold.  In  the 
Fall,  the  Democrats  swept  the  country.  To  leave  nothing 
lacking,  the  Baring  banking  house  in  London  suspended 
in  November.  Before  this  last  disaster,  heavy  foreign  sell- 
ing of  American  securities  had  mysteriously  broken  out, 
due  to  a  fear  that  the  United  States  could  not  maintain 
the  gold  standard,  to  financial  troubles  in  Buenos  Ayres 
and  to  private  knowledge  in  London  of  the  Baring  embar- 
rassment. Gold  was  heavily  exported,  money  grew  scarce 
in  New  York,  and  the  Clearing  House  was  compelled  to 
issue  $16,645,000  of  loan  certificates  to  sustain  the  banks. 

November  15th,  when  the  startling  news  of  the  Baring 
failure  reached  New  York,  a  panic  Hurst  forth  in  Wall 
Street,  the  break  in  stocks  being  urged  furiously  by  a  bear 
party,  having  James  R.  Keene  as  its  leader.  The  break 
was  soon  over  and  December  saw  prices  mounting  again 
rapidly.  But  the  drop  had  cancelled  more  than  half  the 
rise  since  1884.  The  life  was  gone  from  the  bull  move- 
ment. Some  good  stocks  did  not  return  to  the  high  prices 
of  1890  for  years  afterward. 


90  HOW  MONEY  IS  MADE 

In  spite  of  every  set  back,  the  bull  party  persisted  until 
1892  in  an  effort  to  put  the  market  higher.  Some  stocks 
had  not  had  their  proper  rise;  and  a  number  of  them 
made  their  highest  quotations  in  1892.  By  the  Spring  of 
1892,  leading  stocks  had  risen  from  $12  to  $30,  or  $50  to 
over  $100  a  share  (according  as  they  were  the  low  or  the 
high  priced  favorites)  from  the  level  of  1884.  But  the 
two  years  of  1891  and  1892  were  devoted  entirely  to  dis- 
tribution. Sagging  prices  were  the  rule;  and  after  the 
moderate  January  rise  of  1893,  even  the  dullest  mind  was 
aware  of  the  fact  that  the  bull  market  had  ended  and  that 
much  lower  prices  were  ahead. 

The  Crisis  of  1893  was  indicated  by  nearly  all  the 
customary  factors.  The  times  had  been  good.  Enact- 
ment of  the  McKinley  protective  tariff  in  1890  had  stimu- 
lated manufacturing.  Every  vocation  nourished.  For- 
tunes had  been  acquired ;  and  money  was  being  spent  with 
reckless  and  even  vulgar  ostentation.  Wealth  had  been 
added  to  b>y  an  enormous  sale  abroad  of  American  pro- 
duce; and  exports  had  passed  the  billion  dollar  mark  in 

1892,  for  the  first  time  in  history.    Then,  the  current  of 
commerce  changed.    From  an  excess  of  exports  of  $202,- 
875,000  in  1892,  the  balance  of  trade  dwindled,  and  in 

1893,  there  was  an  excess  of  imports  of  nearly  $19,000,000. 
Mr.  Cleveland  was  elected  President  in  November,  1892, 
and  Jay  Gould  died,  December  2d.     The  silver  purchase 
law  had  excited  serious  fears  that  the  United  States  could 
not  maintain  gold  payments;  and,  as  the  Democrats  had 
come  into  power  at  Washington,  every  man  of  political  ex- 
perience fully  expected  a  speedy  downfall  of  the  protec- 
tive tariff.    The  situation  was  full  of  dangers.    The  bank- 
ing situation  was  strained.    Prudent  men  in  Europe  were 
selling  their  American  securities.     As  payment  for  this 


PEOSPERITY  AND  DEPRESSION  91 

flood  of  foreign  liquidation  could  be  made  only  in  gold 
(in  view  of  the  disappearance  of  a  favorable  balance  in 
the  foreign  trade)  there  was  shipped  abroad  in  the  fiscal 
year  of  1893,  net,  $87,506,000  of  gold,  a  sum  only  once  be- 
fore exceeded  and  never  since.  The  drain  upon  banking  re- 
sources forced  the  calling  of  loans  in  December,  1892 ;  and 
rates  for  temporary  accommodations  rose  to  25  and  40  per 
cent.  Conditions  were  ripe  for  a  swift  rending  asunder 
of  the  speculative  structure,  which  had  been  reared  with 
so  much  labor  since  1884. 

The  crash  came,  soon  after  the  collapse  of  the  McLeod 
deal  in  Reading,  February  20,  1893,  and  the  bankruptcy 
of  the  company.  Reading  fell  $22  a  share  within  a  week. 
In  March,  Mr.  Cleveland  was  inaugurated  and  attacked 
monopolies  in  his  address.  The  banks  began  to  call  loans 
again  and  interest  ran  up  to  60  per  cent.  A  genuine  cur- 
rency famine  prevailed.  The  strain  in  financial  circles 
was  terrific.  May  4th,  National  Cordage  went  into  the 
hands  of  a  receiver;  and  next  day,  S.  Y.  White 
announced  his  inability  to  meet  his  obligations.  Panic 
reigned  in  Wall  Street  and  there  has  seldom  been  a  more 
precipitate  decline  in  stocks  than  ensued,  lasting  three 
months.  Good  stocks  fell  rapidly  and  bad  ones  more 
swiftly  yet.  The  big  men  were  out  of  stocks  and  did  noth- 
ing to  support  the  market.  In  June,  an  old  time  remedy 
was  called  into  play;  and  the  New  York  Clearing  House 
made  its  eighth  issue  of  loan  certificates,  a  total  of  $41,- 
490,000.  In  other  cities,  the  Clearing  House  banks  took  a 
similar  course  to  relieve  the  tension.  The  stock  market 
steadied  itself  in  July  and  the  worst  was  over  so  far  as 
securities  were  concerned.  The  ruin  and  distress  in  the 
country  at  large  were,  however,  indescribable.  Failures 
were  announced,  day  after  day,  in  nearly  every  State,  and 


92  HOW  MONEY  IS  MADE 

many  banks  went  down.  The  trouble  was  world  wide  and 
great  banks  also  failed  in  Italy  and  Australia. 

The  blight  upon  business  is  illustrated  by  the  record  of 
commercial  failures,  which  numbered  10,344  in  1892  and 
15,242  in  1893,  liabilities  in  the  first  named  year  being 
$114,000,000  and  in  1893  over  $346,000,000.  Scarce  one 
active  business  man  came  through  unscathed. 

About  one  fourth  of  the  railroad  mileage  of  the  United 
States  went  into  the  hands  of  receivers.  Reading,  Atchi- 
son,  Erie,  Union  Pacific,  Northern  Pacific,  and  New  York 
&  New  England  were  among  the  bankrupt  roads. 

One  favorable  outcome  of  1893  was  the  repeal  of  the 
silver  purchase  law,  at  a  special  session  of  Congress,  called 
by  Mr.  Cleveland  for  that  purpose. 

1896— END  OF  THE  DEPEESSION 

THE  years  of  1894  and  1895  constituted  a  period  of  great 
gloom.  The  benefits  of  the  repeal  of  the  silver  purchase 
law  were  nullified  only  too  soon  by  agitation  for  demolish- 
ing the  protection  of  the  tariff  to  manufactures.  The 
Wilson  tariff,  in  fact,  was  enacted  in  August,  1894,  and 
the  friends  of  home  industry  were  despondent.  Senti- 
ment was  farther  depressed  in  the  Summer  of  1894  by  the 
strike  at  Pullman,  Ills.,  and  the  crimes  and  outrages  per- 
petrated by  the  unions  and  the  march  of  Coxey's  army  of 
tramps  to  Washington.  The  iron  and  steel  trades  suffered 
a  serious  reaction;  and  times  were  hard  everywhere. 
Railroad  construction  was  at  a  low  ebb,  in  consequence  of 
previous  reckless  overbuilding ;  and  a  smaller  mileage  was 
added  to  the  lines  in  operation,  in  each  year,  until,  in 
1896,  the  total  of  new  construction  was  only  1,654  miles. 
A  deficit  in  Government  revenues  soon  occurred  and 


PROSPERITY  AND  DEPRESSION  93 

therefrom  sprang  a  fresh  cause  for  alarm.  The  Treasury 
began  to  be  apprehensive  lest  it  should  become  necessary 
to  encroach  upon  the  $100,000,000  gold  reserve  for  ordin- 
ary expenses  of  the  Government.  By  January,  1895,  in 
spite  of  sales  of  bonds  to  replenish  the  gold  reserve,  the 
Treasury  stock  of  the  coin  had  fallen  to  $44,000,000.  No 
sooner  would  the  gold  reserve  be  recruited  to  a  proper 
point  than  withdrawals  would  commence  again,  the  coin 
being  taken  out  in  exchange  for  greenbacks.  The  gold 
standard  was  once  more  in  danger.  In  January,  1895,  a 
virtual  run  on  the  Treasury  set  in ;  and  gold  went  out  at 
the  rate  of  $3,000,000  a  day  and  $30,000,000  was  taken 
out  not  required  for  export.  Hoarding  of  the  metal  by 
banks  and  private  citizens  began.  This  was  so  serious  an 
evil  that  radical  measures  had  to  be  taken ;  and  in  Febru- 
ary, a  contract  was  entered  into  with  the  Morgan-Belmont 
syndicate  of  bankers  in  New  York,  who  agreed  to  accept 
the  bonds  of  the  Government,  stop  the  export  and  hoard- 
ing of  gold,  and  maintain  the  reserve  intact.  The  action 
of  the  syndicate  was  as  good  as  its  word  and  its  notable 
achievement  did  much  to  reassure  .business  men. 

A  distinct  revival  of  the  iron  trade  was  experienced  in 
1895,  although  dullness  prevailed  in  most  other  vocations. 
Stocks  made  a  start  on  the  highway  to  recovery,  but  pub- 
lic confidence  had  not  fully  returned.  The  market  was 
ripe  for  a  reaction;  and,  at  this  juncture,  December  17, 
1895,  President  Cleveland  sent  to  Congress  his  famous 
message  on  Venezuelan  affairs,  which  seemed  to  contain  a 
threat  of  war  with  Great  Britain  under  certain  contin- 
gencies. In  the  uncertain  state  of  feeling,  this  message 
proved  a  shock  to  the  public  mind.  A  genuine,  even  if 
short  lived,  panic  broke  out  in  Wall  Street,  and  there  was 
a  more  than  fifteen-point  slump  in  stocks. 


94  HOW  MONEY  IS  MADE 

In  1896,  tKe  banking  situation  was  bad.  The  net  ex- 
port of  gold  in  the  fiscal  year  rose  to  $78,884,800,  a  figure 
exceeded  only  twice  before  and  happily  never  since. 
Cash  holdings  of  the  banks  were  low. 

In  July,  1896,  the  historic  Bryan  scare  threw  Wall 
Street  into  a  fresh  panic.  Every  one  sold  stocks  and  in 
August  prices  touched  the  lowest  level  for  ten  years,  go- 
ing below  that  of  1893  and  1894.  The  decline  from  1892 
ranged  from  $20  to  more  than  $90  in  most  stocks.  Union 
Pacific  sold  for  $4  a  share;  Northern  Pacific  for  $3.50; 
Heading  for  $6;  Atchison  for  $8.25,  and  so  on.  Senti- 
ment was  extremely  depressed  that  Summer.  The  Balti- 
more &  Ohio  was  in  the  hands  of  receivers,  the  iron  trade 
was  dull,  other  industries  were  suffering,  and  the  free 
silver  mania  was  raging  throughout  the  country  and 
seemed  about  to  sweep  all  before  it. 

August  was  however  the  turning  point.  Bumper  har- 
vests, wheat  exports,  a  cessation  in  the  outflow  of  gold, 
some  imports  of  the  metal,  and  finally  the  triumphant 
election  of  McKinley  as  President  in  November,  put  an 
end  to  depression  and  revived  hope  throughout  the 
country.  Everybody  scrambled  for  stocks,  manufac- 
turers began  to  prepare  for  a  larger  business  and  a  bull 
market  was  quietly  set  on  foot,  which,  after  a  little,  gained 
headway  and  which  ran  on  for  six  years. 


CRISIS  OF  1903 

The  better  times  did  not  gain  momentum  until  after 
July  24,  1897,  when  the  Dingley  protective  tariff  received 
the  signature  of  President  McKinley.  Swiftly  a  boom 
broke  out  in  stocks.  The  iron  and  dry  goods  trades 


PROSPERITY  AND  DEPRESSION  95 

revived ;  and  all  classes  of  mills  and  shops  were  soon  run- 
ning on  full  time  in  order  to  satisfy  buyers,  who  sent 
in  an  avalanche  of  orders.  Bank  reserves  increased  enor- 
mously. Call  money  loaned  at  nominal  rates  of  interest 
in  1897  and  did  not  harden  greatly  for  several  years.  The 
clouds  of  gloom  fled  before  the  bracing  winds  of  pros- 
perity in  every  part  of  the  United  States  and  the  better- 
ment gained  headway  as  time  wore  on.  In  cities,  the 
erection  of  new  buildings  attained  marvellous  propor- 
tions; and  the  increasing  use  of  iron  and  steel  in  these 
structures  spurred  the  iron  trade.  On  the  lines  of  trans- 
portation, the  rails  hummed  with  the  passing  of  throngs 
of  heavily  laden  trains  and  railroad  earnings  grew  stead- 
ily larger.  Good  times  blessed  the  whole  country.  Every 
business  man  was  doing  well.  Labor  enjoyed  ample  em- 
ployment at  good  wages.  New  ventures  of  all  kinds  were 
launched  by  the  score.  All  the  phenomena  of  profitable 
times  were  visible  on  every  side.  Personal  expenditures 
were  lavish  in  the  extreme  and  men  dressed  their  families 
with  a  magnificence  never  before  witnessed  in  this  re- 
publican country. 

During  this  fortunate  period  of  six  or  seven  years,  no 
influence  seemed  to  be  lacking  to  promote  the  welfare  of 
our  people.  Community  of  interest,  an  old  principle 
under  a  new  name,  developed  among  the  railroads.  Rate 
wars  were  no  more.  Gold  exports  were  moderate  and  ex- 
cited no  concern.  American  breadstuffs  and  other  prod- 
ucts found  a  ready  and  ever  growing  market  abroad ;  and 
by  1901,  excess  of  exports  had  reached  the  astounding 
total  of  $664,592,000. 

Meanwhile,  a  great  bull  market  was  in  progress  at  the 
stock  exchanges.  With  the  inevitable  reactions,  prices 
mounted  steadily;  and  brokers  reaped  a  golden  harvest 


96  HOW  MONEY  IS  MADE 

of  commissions  in  the  execution  of  orders  to  buy  from  every 
State  in  the  Union.  Never  before  had  been  witnessed 
such  interest  on  the  part  of  the  general  public.  Transac- 
tions were  in  enormous  volume,  from  time  to  time ;  and  on 
one  day  in  1901,  sales  at  the  New  York  Stock  Exchange 
reached  3,000,000  shares.  Clerks  were  forced  to  work 
nights  and  holidays  to  make  out  Clearing  House  sheets 
and  post  the  books,  in  order  not  to  be  swamped  with 
the  stream  of  business.  Fortunes  were  made  by  every 
trader.  It  was  enough  to  buy  "any  old  thing"  on  any 
reaction  to  be  sure  of  large  profits  on  the  next  rally. 
Petty  traders  and  big  operators  divided  among  them  the 
rich  profits  which  were  made  every  week. 

It  is  not  to  be  supposed  for  a  moment,  that  the  tranquil 
progress  of  good  times  and  the  boom  in  stocks  was  not 
interrupted,  now  and  then,  by  sinister  incidents.  No  such 
period  has  been  devoid  of  them.  Good  times  were  never 
more  sharply  tested  than  during  the  last  half  of  the  cycle 
under  review. 

Frauds  in  New  York  in  1897  and  the  collapse  of  the  E. 
S.  Dean  Co.  in  the  latter  part  of  1897  set  back  prices  for 
a  time  and  called  out  from  Thomas  W.  Lawson  of  Boston, 
who  was  already  striving  for  publicity,  a  two-page  article 
in  a  New  York  daily  newspaper,  headed  the  Most 
Gigantic  Conspiracy  since  the  Credit  Mobilier." 

The  trans-Missouri  decision,  March  22,  1897,  chilled 
enthusiasm  for  several  months. 

War  with  Spain  in  1898  was  responsible  for  a  sharp 
reaction. 

May  12,  1899,  Roswell  P.  Flower  died  in  the  midst  of 
a  boom  in  certain  stocks,  with  which  his  house  had  been 
identified,  and  the  collapse  of  those  specialties  admin- 
istered another  set  back  to  the  market. 


PROSPERITY  AND  DEPRESSION  97 

In  December,  1899,  British  defeats  in  South  Africa 
startled  the  English  public ;  and  a  sudden  scare  developed, 
heightened  here  by  failure  of  the  New  York  Produce  Ex- 
change Trust  Co.  and  Henry  Allen  &  Co.  During  this 
panic,  call  money  was  quoted  at  186  per  cent. 

In  April,  1900,  John  W.  Gates  caused  the  mills  of  the 
American  Steel  &  Wire  Co.  to  be  closed,  on  account  of  a 
falling  off  in  orders  for  their  products  and  there  was 
another  momentary  chilling  of  hopeful  feeling. 

The  corner  in  Northern  Pacific  in  May,  1901,  and  the 
attendant  panic  of  the  9th  are  memorable  for  the  swift 
and  remarkable  break  at  the  Stock  Exchange  and  the  sud- 
den recovery.  Speculative  favorites  dropped  $25  to  $80  a 
share  from  the  high  prices  made  a  few  days  previously. 
In  a  month's  time,  the  loss  had  practically  been  recovered. 

A  crop  scare  in  1901,  several  suspensions  in  Wall  Street 
and  Canada,  the  shooting  of  President  McKinley,  and  the 
collapse  of  various  wild  cat  securities,  all  aroused  public 
concern  and  contributed  to  render  the  market  wild  and 
irregular 

So  great  was  the  momentum  of  the  good  times,  how- 
ever, that  the  current  of  prosperity  ran  on  undismayed 
until  the  Fall  of  1902.  Wealth  accumulated  in  this  era  as 
never  before.  Hundreds  of  men  obscure  until  the  boom 
in  stocks  had  made  them  rich  took  their  place  among 
old  time  leaders  of  finance,  with  possessions  such  as  they 
had  not  dreamed  of  twenty  years  before. 

At  the  very  height  of  the  good  times,  forces  came  into 
play  in  the  old,  old  way,  which  foreshadowed  a  coming 
crisis. 

Reckless  speculation  had  forced  stocks  to  a  dangerous 
pinnacle  of  prices,  much  beyond  their  investment  worth, 
supplying  an  exact  parallel  to  the  year  of  1864.  A  multi- 


98  HOW  MONEY  IS  MADE 

tude  of  gigantic  corporations  had  been  created,  most  of 
them  a  union  of  smaller  ones,  with  inflated  capitalizations, 
the  common  stocks  of  many  being  given  away  as  a  bonus. 
Over  $2,000,000,000  of  railroad  securities  alone  had  been 
issued  in  addition  to  the  amount  afloat.  Banks,  pools  and 
syndicates  were  loaded  with  a  mass  of  "undigested  se- 
curities "  of  which  so  much  was  said  in  the  newspapers  of 
the  day.  "Indigestible  securities  "they  were  called  by 
James  J.  Hill,  and  that  was  their  character.  They  could 
not  be  sold  at  a  profit  and  all  were  seeking  a  market  in 
vain. 

Banking  capital  had  been  overtaxed  by  the  require- 
ments of  legitimate  business  and  the  pools  in  Wall  Street 
strained  the  resources  of  every  financial  institution  almost 
to  the  breaking  point.  In  New  York,  five  brokerage 
houses  alone  were  borrowers  of  more  than  $100,000,000  of 
money.  The  pools  began  to  find  themselves  in  a  dangerous 
position. 

The  top  of  the  bull  market  came  in  August  and  Sep- 
tember, 1902  Stocks  were  from  $25  to  about  $170  higher, 
than  in  1896  and  the  main  body  of  shares  was  near  to  the 
highest  level  they  had  ever  attained  in  the  history  of 
the  country.  Desperate  efforts  were  made  to  carry  prices 
farther,  but  the  task  was  too  great.  The  public  took 
alarm  and  would  not  buy.  When  call  loans  rose  to  25  and 
35  per  cent  in  October,  the  end  had  come.  The  United 
States  Treasury  was  appealed  to  for  relief  and  something 
was  done  in  the  way  of  anticipating  interest  and  buying 
bonds.  While  stocks  reacted  in  the  latter  part  of  1902,  no 
serious  trouble  developed  until  after  the  January  rise  in 
1903,  although  liquidation  was  going  on  steadily. 

The  banking  situation  remained  bad  all  through  1903, 


PROSPERITY  AND  DEPRESSION  99 

loans  being  in  excess  of  deposits  every  month  except  the 
first  two.  Interest  rates  were  high.  Importing  merchants 
bought  enormously  abroad  and  imports  passed  the  billion 
dollar  mark  for  the  first  time  in  history,  the  balance  of 
trade  in  favor  of  the  United  States  being  reduced  to 
$394,422,000.  Gold  exports  were  avoided  only  by  the  con- 
certed action  of  leading  banks. 

James  J.  Hill  startled  the  public  at  this  juncture  by  de- 
claring in  a  speech  that  the  "crest  of  the  wave  of  prosper- 
ity" had  passed.  A  conviction  that  this  was  true  gradu- 
ally forced  itself  into  an  incredulous  public  mind.  Rail- 
roads were  seen  to  be  economizing  in  their  purchase  of 
rails  and  equipment.  Reaction  set  in,  in  the  iron  and 
other  trades.  In  April,  1903,  a  unanimous  decision  was 
rendered  by  the  United  States  Circuit  Court  of  Appeals 
that  the  Northern  Securities  merger  was  illegal.  This 
decision,  which  had  been  feared  for  several  months  by 
financiers,  unsettled  confidence  by  threatening  that  the 
harmony  in  the  railroad  world  would  be  broken.  Banks, 
pools  and  syndicates  began  immediately  to  unload  some 
of  the  securities  they  were  carrying  and  loans  were  freely 
called.  Liquidation  was  stimulated  by  a  formidable  bear 
party,  which  included  some  of  the  most  daring  and  keen- 
est minds  in  Wall  Street.  By  June,  the  "rich  man's 
panic"  was  in  full  swing.  Stocks  fell  with  hardly  a  halt 
until  September,  1903,  when  with  a  final  smash  amid 
great  excitement,  the  reaction  terminated,  having  run  its 
course  in  one  year's  time.  The  decline  ranged  from  $20 
to  $75  or  more  a  share.  Fortunes  shrank  heavily  during 
the  twelve  months  and  many  business  men  and  specu- 
lators went  to  the  wall. 

In  business  circles,  the  reaction  lasted  until  the  Summer 


100  HOW  MONEY  IS  MADE 

of  1904.  Enforced  closing  of  many  mills  and  shops  was 
reported.  Retrenchment  was  the  order  of  the  day.  Thou- 
sands of  workmen  were  discharged  from  railroads  and 
industries  and  nearly  as  many  clerks  from  offices. 

A  new  era  of  prosperity  was  ushered  in  during  1904. 
Liquidation  of  speculative  accounts  and  the  inaction  in 
trade  had  produced  a  striking  result  in  the  banking  situa- 
tion in  New  York.  Surplus  deposits  rose  from  $40,000,- 
000  below  zero  in  November,  1903,  to  a  surplus  of  $111,- 
000,000  in  August,  1904,  and  interest  rates  were  forced 
down  by  the  plethora  of  funds  to  1  and  2  per  cent  for 
call  loans  and  2y2  to  3%  for  time  money.  The  great  abun- 
dance of  available  cash  led,  as  always,  to  a  bull  market. 

PANIC  OF  1907 

TOP  of  the  boom  was  touched  January  24,  1906.  Stocks 
then  declined.  Business  was  in  a  high  state  of  prosperity 
in  all  parts  of  the  country.  Crops  were  abundant.  Every 
one  was  making  money.  The  railroads  were  crowded  with 
traffic  and  the  number  and  length  of  freight  trains  was  a 
marvel.  Almost  all  the  trunk  lines  and  some  others  voted 
larger  dividends,  Union  Pacific  going  on  a  10  per  cent 
basis.  Wage  advances  were  granted  by  the  railroads  ag- 
gregating about  $100,000,000  and  an  advance  equal  in 
amount  was  conceded  by  the  industries.  Over  $2,000,- 
000,000  of  charters  of  the  million-dollar  class  were  taken 
out,  and  over  $1,000,000  of  new  securities  were  authorized. 
The  old,  old  story  of  the  conditions  forerunning  a  crisis 
was  repeated  in  all  other  particulars.  Bank  reserves  in 
New  York  fell  to  a  low  ebb.  Interest  rates  rose,  and  the 
enormous  excess  of  loans  over  deposits  alone  foreshadowed 
the  turn  in  the  tide.  In  spite  of  rallies,  stocks  ended  the 


PROSPERITY  AND*DEPRE§si'6&"'        '101 

year  lower  than  at  the  start.  In  1907,  after  a  feeble 
January  rally,  and  especially  after  Congress  had  ad- 
journed without  relieving  the  financial  stringency,  liquida- 
tion set  in.  In  March,  a  panic 'broke  out  in  New  York; 
and  stocks  and  bonds  fell  at  times  furiously,  never  stop- 
ping until  November  21st.  The  slaughter  of  prices  was 
terrific.  The  advance  of  the  previous  six  years  was 
wiped  out;  and  the  panic  brought  to  light  the  usual  ex- 
posures of  rottenness  in  various  financial  quarters.  The 
fall  in  the  prices  of  bonds  was  not  the  least  striking  fea- 
ture of  the  panic  of  1907. 

IN  confirmation  of  the  cycle  theory,  allusion  may  be  made 
to  the  assertion  of  a  financial  writer  of  repute  in  New 
York  City,  a  few  years  ago,  that  "an  operator,  to  have 
been  supremely  right,  would  have  changed  his  position  on 
the  market  only  eight  times  in  forty  years ;  the  turning 
points  have  been  1861,  1867,  1872,  1877,  1881,  1885,  1892 
and  1896."  It  is  singular  that  1864  should  have  been 
omitted  from  this  summary ;  but  the  remark  agrees  in  sub- 
stance with  the  ten  year  cycle  theory. 

The  recital  on  the  foregoing  pages  calls  attention,  first 
of  all,  to  the  ten  and  twenty  year  periods.  In  a  less  strik- 
ing way,  it  points  to  the  four  or  five  year  periods. 

Every  crisis  is  preceded  by  money  stringency,  growing 
out  of  the  very  prosperity  which  prevails.  In  good  times, 
every  active  man,  whose  business  is  capable  of  extension, 
applies  to  the  banks  for  a  loan  of  money,  wherewith  to 
carry  on  his  operations.  This  force  acting  in  all  parts  of 
the  country  gradually  brings  into  action  the  funds  which 
the  banks  have  accumulated.  The  volume  of  surplus  de- 
posits begins  to  decline.  The  good  times  have  been  seen 
to  be  favorable  to  new  enterprises,  and  these  are  set  on 


102'  '  HOW  MONEY  IS  MADE 

foot  in  every  direction.  New  corporations  are  organized 
whose  united  capital  will  aggregate  millions,  and  even 
billions.  Their  securities  are  placed  upon  the  market  for 
sale.  Pools  and  syndicates  are  formed  to  carry  the  securi- 
ties and  market  them,  and,  to  secure  the  end  in  view,  the 
securities  are  made  active  at  the  stock  exchanges  and  a 
lively  speculation  is  begun  in  them.  Of  course,  new 
securities  are  created  in  order  to  be  sold;  and  the  "big 
men"  look  forward  to  a  time  when  they  can  transfer  the 
whole  load  to  the  shoulders  of  the  public.  Syndicates  and 
pools  must  have  money,  and  their  borrowings  add  to  the 
burdens  of  the  banks.  Finally,  interest  rates  rise,  owing 
to  the  growing  scarcity  of  available  supplies  of  capital. 
Meanwhile,  business  is  booming  and  every  one  is  making 
money.  Wages  and  the  prices  of  commodities  rise.  Car- 
ried away  by  the  optimistic  spirit  of  the  times,  it  is  uncon- 
sciously held  that  prosperity  will  last  forever  and  great 
extravagance  of  personal  expenditure  is  seen  on  every 
side.  These  features  have  all  preceded  every  crisis  in 
American  business  affairs. 

At  this  point,  it  requires  only  a  serious  shock  to  public 
confidence  to  give  a  grave  set-back  to  prosperity  or  actu- 
ally to  overturn  the  whole  fabric.  Foreign  trade  may 
begin  to  run  against  the  United  States,  depleting  money 
supplies  at  the  very  time  when  they  are  most  needed. 
Some  rude  exposure  of  recklessness  or  fraud  on  the  part 
of  trusted  institutions,  the  bankruptcy  of  a  railroad  or 
failure  of  an  influential  bank  or  operator  in  stocks,  the 
outbreak  of  war,  a  drouth  in  the  West,  or  some  one  of  the 
numberless  other  calamities  which  may  overtake  the 
financial  world,  may  bring  about  the  crash.  If  the  bank- 
ing situation  is  sound,  the  country  will  withstand  a  good 
many  shocks  with  equanimity;  but  if  credit  is  strained, 


PROSPERITY  AND  DEPRESSION  103 

and  especially  if  the  big  men  have  sold  their  surplus 
stocks,  the  crisis  is  inevitable. 

Conversely,  a  period  of  severe  liquidation  in  stocks  and 
business  enterprises  and  a  large  accumulation  of  idle 
funds  in  the  banks,  with  a  fall  in  interest  rates  to  a  mini- 
mum, has  always  preceded  a  turn  for  the  better. 

It  is  to  be  noted,  as  a  distinct  and  logical  phenomenon, 
that  the  decline  in  stocks  antedates  the  actual  turn  in 
business,  and  sometimes  brings  about  the  crisis.  The  top 
of  a  boom  in  stocks  occurs  at  least  one  or  two,  sometimes 
three,  years  before  the  actual  crisis. 

On  the  other  hand,  recovery  in  stocks  sets  in  before  im- 
provement is  at  all  marked  in  trade  circles. 

Just  as  stocks  are  extremely  apt  to  be  bulled  far  above 
investment  worth  in  a  great  rising  market,  so  they  tend  to 
go  much  below  it  in  a  prolonged  reaction. 

A  circumstance  of  momentous  interest  is  the  fact,  that 
the  price  of  good  securities  has  steadily  moved  higher,  on 
the  average,  since  1877,  in  spite  of  all  the  trials  to  which 
they  have  been  subjected  by  panics  and  reaction.  It  is 
true  that  they  decline  in  every  serious  crisis ;  but,  without 
a  single  exception  in  the  last  thirty  years,  the  average  has 
not  fallen  as  low  as  in  the  last  preceding  period  of  depres- 
sion, whereas  they  have  tended  in  each  new  period  of  pros- 
perity to  go  higher  than  ever  before.  Stocks  seem  now  to 
be  established  on  a  level,  permanently  higher,  than  during 
the  whole  period  from  1865  to  1901. 

A  table  will  illustrate  the  effect  of  crises  on  stocks 
during  the  last  forty  years.  Ten  denominations  have  been 
selected,  which  have  been  traded  in,  under  one  corporate 
name  or  another,  since  1860.  The  ten  named  serve  all 
practical  purposes,  because  they  have  moved  up  and  down, 
substantially  in  harmony  with  the  general  list. 


104 


HOW  MONEY  IS  MADE 


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I 


VII 

NOEMAL  YEAELY  MOVEMENTS  OF  PEICES 

AT    LEAST    TWO    SWINGS    UPWARD,    AND    TWO    DOWNWARD,    IN    EVERY 
NORMAL   YEAR.  — THEIR  CAUSES   AND  EXTENT 

IN  a  previous  chapter,  attention  has  been  directed  to 
the  great  movements  in  prices,  which  extend  over  a 
series  of  years,  growing  out  of  the  alternation  of  good 
and  bad  times. 

Another  peculiarity  of  stock  market  movements  is  now 
worthy  of  attention. 

When,  at  the  end  of  a  serious  depression  in  business, 
good  times  are  seen  to  loom  large  ahead,  there  occur 
years,  like  1862,  1879,  1885,  and  1904,  during  which 
stocks  whirl  rapidly  upward,  with  only  the  most  trivial 
reactions,  for  six  months  or  a  year.  This  is  generally 
due  to  the  popular  enthusiasm  and  exultation  over  the 
return  of  good  times,  and  to  the  existence  of  a  large  short 
interest  in  stocks,  which  the  manipulators  will  not  permit 
to  cover  except  at  high  prices.  The  market  starts,  keeps 
going  and  never  comes  backward. 

In  other  times,  the  progress  of  a  panic,  a  dangerous 
position  of  bank  reserves,  high  interest  rates,  and  frantic 
liquidation  cause  prices  to  drop  steadily  for  twelve 
months  or  so,  with  only  the  most  feeble  and  uncertain 
rallies.  Such  years  were  1873,  1876,  1890,  1893,  and  1903. 

105 


106  HOW  MONEY  IS  MADE 

In  the  majority  of  other  years,  however,  when  condi- 
tions are  fairly  stable,  whether  good  or  bad  times  prevail, 
and  when  either  accumulation  or  distribution  by  promi- 
nent interests  is  going  on,  stocks  follow  a  different  course. 
There  are  always  several  turns  in  prices  every  year,  due 
to  manipulation  by  speculators;  but  certain  ones  are 
notable  and  are  expected  and  worked  for  by  traders.  In 
normal  markets,  there  are  at  least  two  strong  swings 
upward  in  stocks,  and  two  downward,  every  year. 

Let  us  consider  the  upward  movements  first. 

Fundamentally,  they  grow  out  of  the  fact,  that  on  or 
about  the  first  of  January  and  July,  the  holders  of  stocks 
and  bonds  in  this  country  receive  the  enormous  sum  of 
$150,000,000  or  more  in  dividends  and  interest  on  their 
security  investments.  Some  distribution  of  this  character 
takes  place,  indeed,  every  month,  the  sum  ranging  from 
$30,000,000  to  $80,000,000.  But  at  the  beginning  and 
in  the  middle  of  the  year,  the  disbursement  is  especially 
heavy;  and  it  tends  to  grow  larger,  year  by  year,  as  the 
country  gains  in  wealth  and  prosperity. 

The  principal  part  of  the  great  sums  in  cash  referred 
to  is  necessarily  devoted  to  the  expenses  of  living.  A 
part  is  expended  in  travel  and  recreation.  Some  of  the 
money  goes  into  real  estate,  life  insurance,  private  busi- 
ness, and  diverse  forms  of  other  investments.  On  the 
other  hand,  many  millions  go  toward  the  purchase  of 
securities.  Thousands  of  people  put  from  $1,000  to  $5,000 
into  stocks  or  bonds;  men  of  large  estates,  banks  and 
insurance  companies  put  from  $100,000  to  $1,000,000 
into  this  class  of  investments.  The  demand  for  good 
securities  is  therefore  much  more  active  at  the  time  of, 
or  just  after,  the  January  and  July  disbursements  than 


NORMAL  YEARLY  MOVEMENTS  OF  PRICES    107 

at  other  seasons.  It  is  a  distinct  phenomenon  in  finance. 
By  concerted  action,  operators  in  stocks  advance  prices 
during  those  two  periods  (if  a  panic  does  not  prevent 
such  a  venture)  with  a  view  of  selling  to  the  public,  at 
good  prices,  the  goods  they  have  bought  during  a  pre- 
vious reaction.  The  Spring  and  Fall  booms  are  cherished 
traditions  of  Wall  Street. 

Old  hands  at  the  business,  who  know  a  thing  or  two, 
do  not  always  wait  until  their  dividends  and  interest 
have  actually  been  paid  to  them.  If  the  general  outlook 
is  favorable,  they  begin  buying  in  June  or  December, 
carrying  their  securities  on  a  margin  until  the  cash  comes 
in,  when  they  pay  outright  for  the  securities  and  take 
them  out  of  the  market.  More  conservative  people  wait 
until  they  have  the  money,  and  then,  after  deliberation, 
they  buy.  This  has  the  effect  sometimes  of  making  the 
price  movement  a  little  different  from  the  one  which 
ought  to  rule  normally. 

In  every  normal  year,  since  1860,  a  considerable  rise 
has  been  engineered  from  some  break  in  the  Fall  or 
December,  into  January;  and,  as  a  rule,  after  a  moderate 
reaction,  the  rise  has  gone  on  into  the  Spring.  The  slow 
movers  advance  from  $5  to  $10  or  more  a  share.  The 
lively  stocks  rise  from  $10  to  $20,  or  more.  January  ends 
the  rise  in  panic  years.  At  such  times,  the  Spring  rise 
amounts  to  little. 

The  second  rise  is  an  incident  of  the  Fall  months.  It 
is  always  equal  in  extent  to  the  Spring  rise,  and,  of  the 
two,  the  Fall  rise  is  generally  the  most  important.  Stocks 
start  from  some  low  level  in  the  Spring  or  July  and 
mount  upward  into  August.  Then,  after  a  reaction,  they 
often  go  higher  yet  into  September  or  October.  The  Fall 


108  HOW  MONEY  IS  MADE 

rise  is  seldom  omitted  even  in  a  bad  year.  If  business 
is  bad,  or  technical  conditions  unfavorable,  the  boom  may 
be  postponed  until  October  or  November,  but  come  it  will, 
sooner  or  later.  In  the  reactions  of  1873  and  1890,  in- 
deed, the  struggle  to  put  the  market  up  in  the  Fall  was  a 
failure.  But  there  was  a  good  rally  in  1893  •,  and  even 
in  1903,  when  the  "rich  man's  panic"  had  cut  many 
fortunes  down  a  half,  the  Fall  rally  was  one  of  great 
spirit,  having  been  promoted  by  the  declaration  of  Wil- 
liam Rockefeller,  that  if  stocks  should  go  up  five  points 
(which  they  did  easily)  they  ought  to  rise  twenty  points 
(which  some  of  them  did,  very  nearly). 

No  exact  date  can  be  named  as  certainly  the  top  of  the 
Spring  or  the  Fall  rise.  Something  depends  in  each  year 
on  the  market  position  of  the  various  pools  and  leading 
operators.  If  they  have  not  yet  liquidated  to  advantage 
the  stocks  they  have  accumulated,  the  market  is  apt  to  be 
maintained  on  as  high  a  level  as  possible  until  the  desired 
end  is  achieved.  April  has,  however,  usually  seen  the  end 
of  the  Spring  boom  in  stocks  and  September  the  Fall 
boom.  In  the  latter  season,  the  top  has  sometimes  been 
reached  in  October  or  November. 

Men  of  long  experience  never  part  with  the  stocks 
which  give  them  a  position  in  their  corporations,  merely 
for  the  sake  of  a  moderate  turn  in  the  market;  but,  in 
favorable  times,  they  almost  always  have  transient  hold- 
ings, which  they  sell  in  the  Spring  and  Fall  months,  tak- 
ing them  back  during  the  next  good  reaction.  The  num- 
ber of  men  who  carry  not  only  moderate  amounts  of 
stock,  but  from  1,000  to  10,000  shares,  for  the  sake  of 
the  normal  yearly  booms,  has  grown  immensely  within 
the  last  ten  years. 


NORMAL  YEARLY  MOVEMENTS  OF  PRICES    109 

Normally,  there  are  also  at  least  two  swings  downward 
in  prices  in  every  twelve  months.  A  variety  of  causes 
contribute  to  the  result;  but  both  may  be  attributed 
mainly  to  money  stringency  and  the  crop  situation;  and 
it  is  to  be  noted  that  speculators  and  pools  always  play 
for  these  reactions,  if  the  times  do  not  entirely  forbid. 

The  serious  nature  of  a  crop  shortage  has  been  ex- 
plained on  another  page.  Spring  and  Summer  are  the 
seasons  for  crop  scares.  Fortunate,  indeed,  are  the  farmers, 
if  a  whole  year  passes  by  without  weather  conditions 
at  some  time  unfavorable  to  the  growing  grain,  cotton 
and  tobacco.  They  no  longer  fear  the  old  time  plague 
of  grasshoppers,  but  they  have  other  troubles.  The  boll 
weevil  in  the  South  may  make  a  difference  in  the  output 
of  cotton;  and  rust,  a  mild  Winter,  drouth  in  the  hot 
season,  and  unseasonable  frosts  have  not  lost  their  terrors. 
If  other  influences  have  conspired  to  weaken  the  ardor 
of  those  who  are  long  of  stocks,  sudden  alarm  as  to  the 
crops  would  mean  a  sharp  and  serious  decline  in  prices. 

In  1890,  the  corn,  wheat  and  cotton  harvests  were  small 
ones;  and  this  was  one  of  the  forces  which  led  to  the 
bad  break  of  that  year. 

In  1901,  hot  winds  in  Kansas  and  drouth  elsewhere 
caused  a  fall  of  $22  to  $43  in  granger  railroad  stocks. 

During  such  declines,  other  good  stocks  fall  in  sym- 
pathy. 

It  must  be  distinctly  kept  in  mind,  that  if  traders  want 
a  reaction,  they  seize  instantly  upon  any  unfortunate 
development  to  bring  about  the  end  desired. 

Violent  breaks  on  crop  shortage  are  usually  transient, 
if  general  trade  is  good,  because  a  loss  of  grain  tonnage 
may  be  offset  by  other  traffic.  A  notable  case  in  point 


110  HOW  MONEY  IS  MADE 

was  an  incident  of  1901.  A  group  of  large  holders  of 
Atchison  and  other  granger  stocks  in  New  York  were 
confronted  with  serious  loss  in  consequence  of  the  crop 
scare  of  that  year  in  July.  Troubled  and  anxious,  they 
sent  envoys  to  the  West  to  study  the  situation  on  the 
spot.  Mr.  Armour  was  consulted  with  reference  to  the 
value  of  the  opinion  of  President  Ripley  of  the  Atchison 
road.  Mr.  Armour  assured  his  visitors  with  an  almost 
religious  solemnity  of  manner,  "Mr.  Ripley  is  the  best 
railroad  president  in  the  United  States."  When  the  en- 
voys called  at  the  office  of  the  head  of  the  Atchison  sys- 
tem, Mr.  Eipley  replied:  "No,  we  have  no  corn;  but 
we  have  oil;  oil  will  compensate  for  the  loss  of  corn." 
New  business  was  coming  forward,  and  the  New  Yorkers 
were  advised  to  hold  on.  They  did  so,  and  made  money 
later  on  their  granger  stocks. 

It  is  in  the  early  Spring,  that  the  financial  world  begins 
to  be  concerned  with  regard  to  the  crops.  April,  May 
and  June  are  usually  months  of  uncertainty.  Hundreds 
of  cautious  investors  sell  their  stocks  during  the  Spring 
rise,  therefore,  preferring  to  buy  them  back,  if  necessary 
even  at  higher  prices,  when  doubt  has  ended. 

Other  influences  which  operate  after  the  Spring  rise 
are  the  higher  rates  of  interest,  which  sometimes  prevail, 
in  consequence  of  the  demand  for  ready  money  among 
the  farmers,  and  the  coming  vacations  of  a  swarm  of  men, 
who  are  off  to  Europe,  the  sea  shore  or  the  woods  for  rest 
and  recreation,  and  who  all  get  out  of  stocks  before 
going. 

Selling  by  any  large  class  of  men  inspires  similar 
action  by  others;  and  there  is  in  every  normal  year  a 
decline  from  the  high  prices  of  the  Spring  running  into 
May  or  June,  and  sometimes  into  July.  It  is  not  un- 


NORMAL  YEARLY  MOVEMENTS  OF  PRICES    111 

common  for  lively  trading  stocks  to  go  down  $15  or  $20 
a  share.  It  must  be  said,  however,  that  if  the  promise 
of  the  crops  is  definite  and  splendid,  the  Summer  reaction 
will  be  extremely  moderate,  other  things  being  equal. 

A  second  swing  downward  occurs  in  the  Fall.  It  is 
primarily  due  to  a  scarcity  of  loanable  funds  in  New 
York  at  that  season  and  is  promoted  by  pools  and  specu- 
lators. The  West  and  South  require  large  sums  of  ready 
cash  to  pay  off  the  harvest  hands  and  others  and  to  start 
the  first  shipments  of  produce  to  market.  Those  sections 
draw  down  their  balances  in  New  York  and  other  central 
cities;  and  other  sums,  large  in  the  aggregate,  are  with- 
held from  deposit.  While  the  banks  of  the  West  and 
South  are  expected  to  finance  the  farmers  and  planters 
in  the  Fall  months,  they  cannot  do  it  without  recalling 
millions  of  their  surplus  money  from  the  East;  and  they 
begin  to  draw  in  August.  The  total  amount  sent  away 
from  New  York  for  harvest  purposes,  each  Fall,  varies 
with  the  size  of  the  crops.  It  has  seldom  been  less  than 
$20,000,000  and  has  been  in  excess  of  $50,000,000. 

Such  an  outflow  of  ready  cash  forces  the  rate  of  interest 
on  loans  of  all  kinds  at  commercial  centers  much  higher 
for  two  or  three  months.  If  trade  is  active,  call  money 
rises  to  8  or  10  per  cent  in  New  York  and  the  rate  fre- 
quently soars  to  25,  30  or  35  per  cent.  In  December, 
1905,  in  New  York,  before  the  current  of  remittances  had 
turned  toward  the  East  again,  call  loans  once  rose  to  125 
per  cent.  Whatever  the  actual  interest  charge,  traders 
find  it  desirable  to  sell  their  long  stock,  and  even  go 
short  of  the  market,  when  rates  are  rushed  up  to  8  per 
cent  or  more.  These  operations  are  the  primary  cause 
of  the  Fall  swing  downward. 

The  September  reaction  is  a  tradition  in  Wall  Street. 


112  HOW  MONEY  IS  MADE 

It  quite  as  often  occurs  in  October  or  November,  but 
sooner  or  later  it  arrives,  in  a  normal  year.  There  is 
often  another  break  in  December,  owing  to  the  high  rates 
which  prevail  when  the  banks  are  accumulating  money 
for  the  January  disbursements. 

When  other  people  have  sold,  and  the  market  is  down, 
those  who  wish  to  take  advantage  of  the  January  rise 
buy  good  stocks,  lay  them  aside,  and  wait  patiently  for 
the  better  prices,  which  are  sure  to  come,  if  business  is 
good  and  the  outlook  free  from  serious  complications. 

Bonds  are  less  affected  by  these  yearly  movements  than 
stocks,  but  are  not  altogether  indifferent  to  them.  Many 
men  who  can  get  10  to  20  per  cent  on  call  loans  are 
tempted  to  sell  their  bonds  and  put  the  money  out  at 
interest  until  the  flurry  is  over.  Selling,  whatever  the 
cause,  if  in  any  considerable  volume,  always  depresses 
the  market. 

It  is  perfectly  legitimate  for  an  investor  to  take  advan- 
tage of  the  normal  swings  of  the  stock  market.  In  fact, 
it  is  sometimes  of  the  greatest  importance  that  he  should 
do  so.  Every  boom  in  stocks  since  1860  has  culminated 
at  the  top  of  either  the  normal  Spring  rise  or  the  one  in 
the  Fall.  Every  considerable  decline,  in  times  of  panic 
and  depression,  has  ended  during  either  the  Spring  or 
Fall  break.  The  turning  points  of  the  great  major  move- 
ments in  stocks,  growing  out  of  good  or  bad  times,  coin- 
cide as  a  rule  with  the  turning  points  of  the  normal  yearly 
swings.  If  fundamental  conditions  are  such  that  a  com- 
ing change  in  the  trend  of  business  affairs  (and  therefore 
of  stocks)  is  indicated,  an  investor  will  be  safer  to  sell, 
or  buy,  when  the  market  is  about  to  turn. 

An  investor  will,   as   a   consequence,   pay   calm   and 


NORMAL  YEARLY  MOVEMENTS  OF  PRICES    113 

diligent  attention  to  the  broad  features  of  the  situation 
and  will  be  constantly  on  the  alert  for  those  signals  of 
finance  which  tend  to  show  what  the  trend  of  events 
is  likely  to  be  for  the  next  few  months  or  the  next  year 
or  so.  He  will  disregard  entirely  the  numberless  twists 
and  small  turns  in  prices  which  occur  from  day  to  day 
and  week  to  week. 

An  investor  needs  hardly  to  be  advised  on  one  point, 
yet  for  clearness  the  matter  may  be  mentioned.  If  the 
financial  position  is  strained  and  stocks  have  started 
downward  strongly,  and  if  he  has  sold  on  the  January 
or  Spring  rise,  there  will  be  no  advantage  in  buying 
until  July  or  the  Fall  months.  It  will  not  do  to  buy 
on  the  Spring  reaction,  because  the  market  is  certain 
to  go  lower  before  the  movement  is  ended.  On  the  other 
hand,  if  the  market  has  been  falling  violently  for  six 
months  or  more,  and  has  entered  finally  upon  a  period 
of  comparative  stability  or  an  actual  rise,  and  if  the 
financial  situation  has  eased  and  money  is  abundant  and 
interest  rates  are  low,  then  it  will  seldom  pay  an  investor 
to  try  and  catch  the  three  months'  turns.  After  a  bad 
smash,  the  market  is  apt  to  have  a  strong  rise  for  a  year 
at  least.  An  investor  will  do  better  not  to  sell  until 
prices  have  improved  materially  and  at  the  occurrence  of 
a  strong  Spring  or  Fall  rise. 

The  general  course  of  the  stock  market  at  New  York 
since  1860  is  illustrated  elsewhere  by  an  important  and 
interesting  chart. 


VIII 

COURSE  OF  THE  STOCK  MAEKET  SINCE  1860 

BULL  AND  BEAR  MARKETS  SHOWN  GRAPHICALLY. — A   CHART    OF    THE 
FLUCTUATIONS  OF  TEN  SELECTED  STOCKS 

IN  order  to  be  fully  in  touch  with  the  subject  under 
discussion  in  this  book,  it  is  desirable  that  an  investor 
shall  know  just  what  the  stock  market  has  done  during 
a  series  of  years,  say  since  1860. 

This  can  be  shown  by  a  chart  of  the  average  price  of  a 
number  of  broad  trading  stocks.  As  go  the  leaders,  so 
goes  the  whole  market;  and  the  movements  from  season 
to  season,  and  year  to  year,  of  a  few  prominent  stocks, 
correspond  closely  with  the  swings  of  the  whole  body  of 
stocks. 

For  special  reasons,  the  stocks  selected  for  this  chart 
are :  Until  1870  inclusive,  C.  C.  C.  &  St.  L. ;  Central  of 
New  Jersey;  Cleveland  &  Pittsburgh;  Erie;  Delaware  & 
Hudson;  Illinois  Central;  New  York  Central;  Reading; 
Rock  Island ;  and  Chicago,  Milwaukee  &  St.  Paul. 

In  1871,  Chicago  &  Northwestern  and  Union  Pacific  are 
substituted  for  Erie  and  Cleveland  &  Pittsburgh,  and  run 
through  to  the  end. 

From  1873  to  1879,  both  inclusive,  Reading  is  omitted 
(not  being  traded  in  at  New  York)  in  favor  of  Chicago  & 
Alton.  Alton  is  dropped  in  1880. 

In  1899,  Pennsylvania  is  substituted  for  Rock  Island 
and  runs  through  to  the  end. 

114 


COURSE  OF  THE  STOCK  MARKET  SINCE  1860   115 

These  ten  stocks  answer  the  purpose  very  well.  They 
include  granger,  coal  and  general  traffic  railroads,  and 
their  market  value  had  fluctuated  strictly  in  accordance 
with  the  times  and  the  seasons  of  the  year.  Any  other 
group,  covering  any  part  of  the  whole  period  since  1861, 
would  show  swings  in  price,  corresponding  closely  to  those 
in  the  chart;  and  the  ten  named  indicate  satisfactorily 
the  general  course  of  the  whole  market. 

Attention  is  called,  first,  to  the  high  prices  of  1864. 
Paper  money  inflation  and  the  protective  tariff  underlaid 
this  great  rise.  A  fact  which  contributed  to  the  power 
of  the  bull  party  in  that  period  was  the  small  capitaliza- 
tion of  the  railroad  companies.  It  was  no  difficult  matter 
for  a  strong  group  of  moneyed  men  to  buy  up  the  whole 
floating  supply  of  any  given  stock  and  put  the  price  to 
unheard  of  figures.  The  high  level  of  1864  was  far  in 
excess  of  investment  values  and  a  long  decline  was  in- 
evitable, thereafter,  until  values  had  become  readjusted 
to  earnings. 

After  the  Civil  War,  a  long  period  ensued  during 
which  the  governing  forces  were  against  the  prices  of 
stocks,  as  a  body.  Reckless  watering  of  capitalizations, 
contraction  of  the  currency,  rate  wars  between  railroads, 
tinkering  of  the  tariff,  competitive  building  of  railroads 
and  immense  issues  of  new  stocks  and  bonds  all  contri- 
buted to  depress  the  value  of  securities.  While  the  market 
swung  upward  and  downward,  in  accordance  with  good 
and  bad  times,  yet  until  nearly  the  last  of  the  fearful 
crop  of  reorganizations,  along  about  1896,  the  average 
level  of  prices  ranged  between  the  low  point  of  1861  and 
a  point  half  way  up  to  the  dizzy  top  of  1864. 

A  new  era  then  began.    The  country  had  grown  enor- 


RANGE  OF  TEN  STOCKS 

I  860  to  1884 


116 


RANGE  OF  TEN  STOCKS 

1885  to  April,  19O9 


117 


118  HOW  MONEY  IS  MADE 

mously  in  population  and  riches.  Earnings  began  to  be 
sufficient  to  pay  dividends  upon  millions  of  formerly  al- 
most worthless  stocks;  and  in  1901,  the  stock  market  en- 
tered upon  what  may  be  called  an  entirely  new  field. 
The  average  price  of  stocks — not  only  those  which  appear 
in  the  chart,  but  all  others — rose  above  the  range  of  the 
previous  thirty-five  years  and  in  1905  passed  far  beyond 
the  top  of  1864.  So  far  as  human  judgment  can  discover, 
the  average  level  of  prices  is  likely  to  remain  in  this  new 
field  for  a  generation  or  more.  If  paper  money  inflation 
played  a  part  in  the  excited  rise  of  prices  in  1864,  gold 
inflation  is  equally  active  now.  Panics  there  will  be,  as 
there  always  have  been.  Periods  of  depression  will  occur. 
It  may  be  that  serious  changes  will  take  place  in  the 
tariff  and  other  policies  of  the  United  States,  which  will 
result  in  such  reorganizations  as  will  squeeze  the  "water" 
out  of  the  stocks  of  many  companies  which  must  be  con- 
sidered as  overcapitalized,  even  in  this  day  of  large  earn- 
ings. The  stock  market  cannot  escape  the  long  declines 
which  bad  times  always  ensure.  In  spite  of  all  these  con- 
siderations, it  is  probable  that  prices  will  never  again 
see  the  low  level  of  1860,  1877  and  1896,  unless  high 
finance  should  decide  to  enter  upon  another  era  of  reckless 
watering  of  capitalizations,  or  socialistic  madness  take 
possession  of  the  American  people,  or  such  action  should 
be  taken  with  reference  to  the  protective  tariff  as  to  de- 
stroy the  prosperity  of  the  country,  or  the  modern  mania 
for  "regulating"  railroads  should  finally  result  in  a 
serious  diminution  of  their  earnings. 


IX 

POINTS  TO  BE  WATCHED 

EARNINGS.—  STATE  OF  THE  CHOPS.—  COMPETITION,  THE  TARIFF,  AND 
MONEY  SUPPLIES. —  TREND  OF  THE  TIMES. —  GOLD  PRODUCTION. — 
SOURCES  OF  INFORMATION 

A  NUMBER  of  broad  influences  affect  the  value  of 
stocks  and  underlie  the  booms  and  periods  of  depres- 
sion which  succeed  each  other  in  the  business  world.  To 
these,  an  investor  needs  to  be  alive. 

Cynics  believe  that  manipulation  is  the  only  factor  of 
importance  in  the  stock  market.  They  assert,  that,  if  the 
"big  men"  want  stocks  to  rise,  they  rise,  even  if  some 
reasons  exist  why  they  should  not.  Conversely,  if  the 
same  influential  personages  want  stocks  to  go  down,  they 
fall,  even  if  the  times  are  good.  This  is  true  within  cer- 
tain limits.  Nevertheless,  it  is  beyond  dispute  that  lead- 
ing interests  never  oppose  an  unmistakable  trend  of  the 
times.  Even  if  they  are  disposed  to,  the  strong  may  give 
battle,  but  they  are  defeated  by  the  irresistible  force  of 
conditions.  So  many  proofs  of  this  exist  in  Wall  Street 
history,  that  the  matter  seems  hardly  worthy  of  argu- 
ment. 

What  are  the  underlying  conditions  which  should  be 
carefully  watched? 

119 


120  HOW  MONEY  IS  MADE 

EAENINGS 

THE  value  of  the  whole  body  of  good  securities,  and  of 
each  particular  one,  depends  almost  wholly  upon  earn- 
ings. Those  which  have  voting  power  are  always  worth 
something  for  control  of  corporations.  But  it  is  axio- 
matic, that,  whether  a  stock  pays  a  dividend  or  not,  the 
larger  the  earnings,  the  higher  the  price. 

Growing  earnings  mean  higher  prices  for  the  stocks  and 
bonds.  Reduced  profits,  if  due  to  other  than  transient 
or  accidental  causes,  forecast  a  fall,  which  will  be  as  cer- 
tain in  results  as  the  laws  of  gravity.  One  has  simply  to 
consult  the  high  and  low  prices  of  a  number  of  selected 
stocks  on  another  page,  with  the  dividends  paid  thereon 
in  different  years,  to  realize  this  fully.  Vigorous  and 
skillful  manipulation  may  force  a  good  dividend  paying 
stock  far  above  its  investment  worth,  but  high  prices  can- 
not be  maintained  for  a  stock  which  does  not  earn  any- 
thing. 

Whether  Union  Pacific  shall  sell  at  $4  a  share,  as  it  did 
in  1895,  or  around  $185  as  in  the  Fall  of  1906,  is 
regulated  primarily  by  the  earnings  and  the  size  and  cer- 
tainty of  the  dividends.  When  United  States  Steel,  pre- 
ferred, then  and  yet  paying  7  per  cent,  fell  to  $50  a  share 
in  1903,  the  effective  force  in  bringing  about  that  very 
low  price  was  the  general  fear  that  7  per  cent  would  no 
longer  be  paid— the  dividend  on  the  common  stock  being 
then  in  peril,  as  later  events  proved.  The  recent  rise  in 
the  Steels  is  due  entirely  and  directly  to  the  handsome 
earnings,  the  ability  of  the  corporation  to  pay  7  per  cent 
on  the  preferred  in  dull  times,  its  enormous  surplus,  and 


POINTS  TO  BE  WATCHED  121 

the  return  to  dividends  on  the  common.  Missouri 
Pacific  passed  its  dividend  in  1891  and  worked  down  from 
$77  a  share  to  $10  in  1897;  but  when  larger  profits 
pointed  to  an  early  return  of  the  stock  to  the  rank  of  a 
dividend  payer,  Missouri  Pacific  rose  irresistibly  to  $100 
in  1901,  even  before  payments  were  actually  resumed. 
Amalgamated  Copper  went  to  $130  a  share  in  1901,  of 
course  through  able  manipulation,  but  the  stock  was  pay- 
ing 8  per  cent;  when  the  directors  voted  a  dividend  re- 
duction and  put  the  stock  on  a  2  per  cent  basis,  the  inevit- 
able result  was  that  in  the  panic  of  1901  the  stock  dropped 
to  $34  a  share.  It  has  since  risen  to  around  $119  on  be- 
ing placed  on  a  6  per  cent  basis.  American  Smelting, 
common,  once  a  worthless  stock,  given  away  as  a  bonus, 
sold  as  low  as  $37  in  1902  and  1903 ;  but,  after  dividends 
were  begun  in  1904,  a  steady  rise  followed,  and  that  once 
despised  stock  sold  as  high  as  $174  in  the  Winter  of 
1905/6. 

The  market  is  full  of  recent  instances  of  rise  in  price 
among  non-dividend  paying  and  common  stocks,  which 
have  resumed  dividends  after  a  long  suspension  or  are 
approaching  the  time  when  initial  dividends  must  be 
declared. 

That  earnings  are  the  vital  factor  seems  hardly  worth 
farther  argument. 

Railroads  usually  issue  a  monthly  report,  often  a  weekly 
statement,  and  always  an  annual  report,  in  which  net 
profits  are  set  forth  and  compared  with  those  of  corre- 
sponding periods  in  the  year  before.  Gross  and  net  earn- 
ings of  the  principal  lines,  by  months,  are  compiled  and 
summarized  by  several  of  the  financial  weeklies  and 
dailies  of  New  York  city.  These  are  worthy  of  careful 


122  HOW  MONEY  IS  MADE 

perusal  by  investors.  They  show  at  a  glance  the  trend  of 
the  times  as  to  railroad  earnings  and  the  prosperity  of 
each  of  the  principal  lines. 

Among  industrials,  the  best  example  of  candor  in  deal- 
ing with  the  public  is  shown  by  the  United  States  Steel 
concern,  which  issues  an  elaborate  quarterly  statement 
of  profits  and  state  of  the  business.  It  forms  one  of  the 
most  valuable  items  of  news  in  the  financial  papers. 
Other  industrials  are  not  all  so  candid;  but  many  of  the 
best  of  them  publish  annual  reports  of  great  clearness 
and  value. 

FOREIGN  COMMERCE 

A  FRUITFUL  source  of  ample  money  supplies  is  the  foreign 
trade  of  the  country;  and  conversely,  at  times,  a  serious 
drain  upon  the  financial  resources  of  the  banks  arises  from 
an  adverse  balance  in  foreign  commerce. 

The  Government  issues  a  monthly  statement  on  this 
subject,  which  shows  not  only  the  balance  for  or  against 
the  country  in  the  merchandise  transactions,  but  also  the 
net  export  or  import  of  gold  and  silver.  It  is  printed  in 
all  the  daily  newspapers. 

Statistics  are  sometimes  dry  reading;  but  those  of  the 
foreign  commerce  of  the  United  States  are  always  elo- 
quent and  should  receive  the  most  careful  attention. 

CROPS 

A  LARGE  part  of  the  income  of  all  railroad  lines  is  derived 
from  the  shipment  of  grain,  produce  and  cotton.  From 
6,000,000  to  15,000,000  tons  of  these  articles  are  shipped 
by  jail  to  seaboard  cities,  every  year,  for  exportation  to 


POINTS  TO  BE  WATCHED  123 

foreign  lands.  A  far  larger  tonnage  is  moved  by  rail 
from  farm  and  plantation  to  the  cities  and  other  settle- 
ments of  the  country.  In  the  fiscal  year  of  1903,  the  con- 
tribution to  railroad  traffic  from  this  source  was  more 
than  30,000,000  tons  of  grain,  10,000,000  tons  of  flour, 
about  3,000,000  tons  of  cotton,  and  a  vast  additional 
quantity  of  potatoes,  fruit,  tobacco  and  other  products  of 
the  harvest.  More  than  once,  in  our  history,  in  dull  times, 
has  a  loss  in  other  earnings  been  made  good  by  the  trans- 
portation of  agricultural  produce,  and,  in  good  times, 
bumper  crops  are  of  enormous  and  direct  value  to  every 
railroad  in  the  land. 

The  productions  of  the  soil  affect  powerfully  the  pros- 
perity of  the  United  States  in  another  way.  Their  money 
value  in  a  good  year  is  almost  bewildering.  The  staple  crops 
which  are  reported  on  by  the  Government  in  its  monthly 
statement  of  acreage  and  condition  approximated  a  money 
value  of  $3,500,000,000  in  1905 ;  and  a  fluctuation  of  $500,- 
000,000  in  this  immense  total,  which  is  not  uncommon,  is 
felt  at  once  in  the  business  world.  A  boom  in  stocks  has, 
more  than  once,  originated  in  good  crops.  Depression  has 
at  times  begun  with  a  partial  crop  failure. 

Bountiful  harvests  have  another  and  interesting  effect, 
in  that  the  exportable  surplus  enables  the  United  States 
to  pay  off  its  Borrowings  of  money  abroad  and  to  create 
a  credit,  which,  if  large  enough,  ensures  early  importa- 
tions of  gold. 

There  is  no  topic  more  deserving  of  interested  attention 
than  the  state  of  the  crops.  Valuable  data  on  this  point 
are  supplied  from  Washington.  On  the  first  of  each 
month,  an  estimate  is  published  as  to  the  outlook  in  cotton 
production.  On  the  10th,  a  similar  report  is  made  as  to  acre- 
age and  condition  of  the  staple  grain  crops.  While  none  of 


124  HOW  MONEY  IS  MADE 

these  estimates  is  to  be  taken  too  literally,  and  while  some 
of  them  have  been  exposed  to  serious  criticism,  they  are  all 
eagerly  looked  for  by  business  men;  and  they  reflect  at 
least  the  general  facts  as  to  the  promise  of  the  harvest. 

Weekly  and  other  reports  are  also  made  by  the  Weather 
Bureau.  These  are  all  printed  in  the  daily  and  financial 
newspapers  and  form  an  important  guide. 

One  of  the  best  of  the  New  York  financial  dailies  also 
compiles  its  own  estimate  on  cotton  prospects. 

The  profits,  and  therefore  the  stocks,  of  railroad  lines 
which  run  through  the  grain  and  cotton  sections,  are 
affected  in  the  most  direct  and  powerful  fashion  by  the 
promise  of  generous  or  stunted  crops;  and  as  they  go, 
so  goes  the  general  market.  Investors  need  to  keep  in 
touch  with  the  crop  outlook.  Wall  Street  always  dis- 
counts the  future  and  never  waits  for  earnings  to  be  af- 
fected actually  before  adjusting  prices  to  what  it  sees 
coming. 

DOMESTIC  TEADE 

A  SLACKENING  of  trade  after  a  great  'Boom  precedes 
every  financial  crisis ;  and  an  investor  must  be  as  alert  to 
detect  the  signs  of  a  coming  change  of  importance  as  are 
the  bankers,  rich  men  and  stock  operators,  upon  whom  the 
fortunes  of  the  stock  market  depend. 

It  is  axiomatic  that  all  railroads  are  affected  directly  and 
seriously  by  active  or  dull  times  and  industrial  stocks 
peculiarly  so.  The  subject  of  the  state  of  domestic  trade 
is  one  which  requires  constant  attention,  and  never  more 
so  than  when  a  boom  or  a  reaction  has  run  on  for  a  num- 
ber of  months  or  years. 


POINTS  TO  BE  WATCHED  125 

Indications  of  the  general  course  of  trade  are  at  the 
command  of  all.  Nearly  every  one  toils  in  America ;  and 
whether  business  is  good  or  bad  is  a  constant  theme  of  dis- 
cussion among  acquaintances.  A  number  of  authorities 
can  be  consulted,  which  afford  a  wide  and  accurate  view 
of  the  whole  business  field.  Among  them  ere : 

The  careful— they  may  almost  be  said  to  be  official — 
reports  on  the  iron  and  steel  industry,  issued  by  two  lead- 
ing weekly  newspapers  devoted  to  that  trade.  As  a  mat- 
ter of  wide-spread  interest  and  importance,  those  reports 
are  republished  now  by  nearly  all  the  leading  daily  news- 
papers. 

Resumes  of  the  present  state  of  trade  are  sent  to  the 
press,  every  Saturday,  by  the  two  mercantile  agencies  of 
New  York  City.  These  Argus-eyed  concerns  are  in  close 
touch  with  correspondents  in  every  city  and  settlement 
in  the  Union ;  and  their  reports  are  accurate,  dispassion- 
ate and  valuable. 

Various  sound  and  conservative  financial  weeklies  and 
dailies  make  a  specialty  of  publishing  not  only  the  news 
but  the  drift  of  events  in  important  industries;  and  they 
are  among  the  very  first  to  detect  and  announce  a  quicken- 
ing or  slackening  of  business. 

Bank  clearings  in  principal  cities  are  compiled  weekly 
and  are  worth  watching. 

COMPETITION 

THERE  is  no  influence  to  which  a  particular  stock  responds 
more  quickly  than  new  and  damaging  competition.  It 
would  be  almost  impossible  to  point  out  a  form  of  busi- 
ness in  the  United  States  which  is  not  exposed  to  competi- 


126  HOW  MONEY  IS  MADE 

tion  in  some  form  or  other.  Even  the  great  railroad  lines, 
which  seem  to  have  an  entire  monopoly  of  local  traffic, 
even  the  Standard  Oil  Company  and  various  of  the  other 
so-called  trusts,  which  appear  to  come  the  closest  to  monop- 
olies, live,  move  and  have  their  being  in  an  atmosphere 
of  competition  and  not  one  of  them  is  free  from  more  or 
less  of  it. 

Community  of  interest  has  minimized  rivalries  to  some 
extent  but  has  by  no  means  abolished  it.  Every  railroad 
man  will  agree  to  that. 

While  competition  is  a  necessary  condition,  under  which 
business  is  carried  on,  it  is  only  such  an  increase  of  com- 
petition as  is  likely  to  exert  a  vital  influence  upon  earn- 
ings that  proves  disconcerting. 

When  Andrew  Carnegie  proposed  to  build  a  tube  plant 
in  Ohio  in  opposition  to  the  National  Tube  Company,  this 
was  a  serious  threat ;  and  the  common  and  preferred  stocks 
of  the  company  named  promptly  fell  $19  and  $13  a  share, 
although  no  actual  competition  could  have  been  felt  for  a 
year  afterward. 

The  genuine  nature  of  the  calamity  of  the  outbreak  of 
new  and  unreasonable  competition  was  well  exhibited  by 
the  loss  of  earnings  consequent  upon  the  rate  wars  be- 
tween trunk  line  railroads  in  the  '70s  and  '80s. 

An  extreme  case  of  loss  inflicted  upon  stockholders  by 
new  and  dangerous  competition  was  the  historic  break 
in  Pacific  Mail  and  Panama  Railroad,  after  the  opening 
of  the  overland  rail  route  to  California.  Those  stocks 
had  sold  at  unheard  of  prices  during  the  Civil  War  period, 
as  a  result  of  enormous  earnings.  In  September,  1868, 
Panama  was  quoted  at  $369.  Pacific  Mail  went  to  $329 
in  1865,  and  even  after  a  stock  dividend  of  33%  per  cent 
in  1866,  it  sold  at  $174.  More  than  a  year  before  the 


POINTS  TO  BE  WATCHED  127 

Union  Pacific  route  was  thrown  open  for  business,  far 
seeing  holders  of  Panama  and  Pacific  Mail  stocks  became 
convinced  that  trade  and  travel  would  naturally  seek  the 
shorter  and  more  expeditious  line  to  San  Francisco;  and 
they  began  to  sell  out.  By  the  time  the  overland  railroad 
was  actually  in  operation,  less  attentive  stockholders  took 
alarm  also  and  selling  was  more  general.  By  1870,  Pacific 
Mail  had  fallen  to  $30%,  and  by  1871,  Panama  was  down 
to  $49. 

New  York  Central  stock  was  worth  $155  in  January, 
1881,  but  the  West  Shore  road  was  finished  in  1882 ;  and 
New  York  Central  fell  to  $81%  in  June,  1885,  in  conse- 
quence of  loss  of  earnings.  It  was  then  that  the  Vander- 
bilt  interests,  in  desperation,  acquired  the  entire  capital 
stock  of  West  Shore  and  put  an  end  to  a  competition 
which  was  slowly  wrecking  the  prosperity  of  the  older 
company. 

Metropolitan  Street  Railway  sold  at  $269  in  1899,  at 
which  price  it  may  or  may  not  have  been  dear,  all  things 
considered.  But  after  the  Subway  in  New  York  had  Heen 
opened  for  traffic  and  had  diverted  millions  of  fares  to  its 
own  coffers,  Metropolitan  sold  as  low  as  $103. 

No  doubt,  the  effects  of  excessive  competition  have 
come  within  the  personal  experience  of  thousands  of  busi- 
ness men.  No  need  to  dwell  upon  its  consequences.  But 
it  is  important  for  an  investor  to  be  wide  awake  to  every 
sign  of  the  coming  of  serious  rivalry  against  companies 
whose  stocks  he  owns. 

TAEIFF  CHANGES 

THE  propriety  of  high  or  low  duties  on  foreign  goods  is 
in  dispute  among  politicians  and  economists,  and  has 


128  HOW  MONEY  IS  MADE 

ever  been  since  the  adoption  of  the  Constitution.     The 

subject  will  always  be  with  us. 

No  one  will  contest  the  point,  however,  that  the  substi- 
tution of  one  class  of  duties  for  the  other  is  a  momentous 
event  in  the  affairs  of  any  country. 

In  the  United  States,  the  business  world  has  become  ac- 
customed to  the  protective  principle;  and  even  the  pros- 
pect of  reduced  duties  has  always  chilled  the  spirit  of 
enterprise,  while  the  reality  has  always  given  a  set  back 
to  business,  sooner  or  later.  On  the  other  hand,  enact- 
ment of  a  protective  tariff,  in  lieu  of  one  for  revenue  only, 
has  always  proved  exciting  and  has  quickened  into  intense 
activity  the  looms,  forges  and  machinery  of  the  entire 
country. 

The  backward  state  of  American  industry  prior  to  the 
Civil  War  is  held  to  have  been  due  in  large  measure  to 
the  relaxation  of  protection  under  the  tariff  laws  of  1842 
and  1857.  There  can  be  no  question,  that  the  twenty  or 
more  tariff  enactments  from  1861,  when  the  Morrill  pro- 
tective tariff  went  into  operation,  to  1872,  when  the  sys- 
tem had  been  fairly  adjusted  to  the  requirements  of  home 
industry,  aided  materially  in  developing  the  mines,  sus- 
taining the  factories  against  foreign  competition,  supply- 
ing the  railroads  with  an  immense  and  profitable  traffic, 
and  promoting  the  farming  interests  of  every  section  of 
the  States. 

The  lower  duties  of  1883  on  many  manufactures  added 
to  the  force  of  other  evil  influences,  which  ended  in  the 
crisis  of  1884. 

The  crisis  of  1893  rose  in  a  distinct  measure  from  the 
agitation  in  the  then  Democratic  Congress  for  a  tariff  for 
revenue  only,  which  eventuated  in  the  Wilson  bill. 


POINTS  TO  BE  WATCHED  129 

The  prosperity  which  the  States  now  enjoy  must  be  at- 
tributed in  a  marked  degree  to  the  protective  tariff, 
enacted  under  President  McKinley. 

All  writers  on  crises  agree  in  giving  great  weight  to 
tariff  changes.  An  investor  should  therefore  at  all  times 
be  fully  informed  with  regard  to  such  actual  or  possible 
revolutions  in  political  control  at  Washington,  as  are 
likely  to  have  a  bearing  on  the  tariff  laws. 


SUPPLY  OF  MONEY 

No  BULL  campaign  in  stocks  is  possible  without  ample  sup- 
plies of  money  and  moderate  rates  of  interest,  at  the  out- 
set, and  this  may  also  be  affirmed  of  a  boom  in  business. 

When  for  any  reason,  cash  holdings  of  the  banks  are 
low  and  high  rates  are  charged  for  call  and  time  loans, 
there  is  always  danger  of  a  decline  in  securities ;  and  the 
condition  of  the  banks  may  actually  foreshadow  an  ap- 
proaching crisis. 

National  banks  in  New  York  city  are  compelled  by  law 
to  maintain  a  specie  and  legal  tender  reserve,  equal  to 
25  per  cent  of  the  amount  of  their  deposits.  When  re- 
serves have  fallen  below  the  legal  limit,  the  loaning  power 
of  the  banks  is  ended  for  the  time  being.  If  reserves 
show  a  deficit,  the  banks  are  perforce  obliged  to  call  in  a 
part  of  their  loans.  Stock  speculators  are  then  obliged  to 
throw  overboard  a  part  of  their  loads  in  order  to  raise 
funds  wherewith  to  repay  their  loans.  Selling  of  this 
compulsory  character  invariably  means  a  slump  in  the 
stock  market  and  possibly  a  long  decline.  It  may  also 
lead  to  liquidation  in  .business  enterprises. 


130  HOW  MONEY  IS  MADE 

The  most  recent  instance  of  this  kind  was  the  situation 
in  Wall  street  in  the  Fall  of  1902.  The  banks  had  reached 
the  limit  of  their  ability  to  finance  the  pools  and  syndi- 
cates, which  had  boomed  stocks  to  the  dizzy  pinnacle  of 
prices  at  that  time.  They  called  loans,  initiating  the 
downward  movement  in  stocks,  which  ended  in  the  "rich 
man's  panic"  of  1903  and  was  attended  with  a  reaction 
in  general  business. 

It  is  not  difficult  to  keep  fully  in  touch  with  the  condi- 
tion of  the  national  banks.  Every  few  months,  the  Treas- 
ury at  Washington  calls  upon  the  banks  of  the  United 
States  to  make  an  elaborate  report  of  their  deposits,  loans, 
assets,  etc.,  and  the  replies  are  tabulated,  summarized,  and 
published  in  the  associated  press  dispatches.  The  situa- 
tion in  the  United  States  at  large  is  disclosed  by  these 
reports.  It  is  important  to  watch  for  them. 

In  New  York,  and  other  clearing  house  cities,  a  state- 
ment is  issued  by  the  associated  banks  every  Saturday 
forenoon.  In  New  York,  at  any  rate,  this  weekly  state- 
ment is  not  a  finality  as  to  the  whole  banking  position, 
for  several  reasons.  Loans  and  deposits  of  the  trust  com- 
panies are  not  included,  nor  are  those  of  such  large  pri- 
vate banks  as  J.  P.  Morgan  &  Co.,  Kuhn,  Loeb  &  Co.,  the 
Seligmans,  etc.,  nor  of  some  other  institutions.  Nor  does 
the  statement  represent  the  situation  at  the  close  of  busi- 
ness on  Friday,  but  sets  forth  the  average  of  the  six  days 
since  last  statement.  Furthermore,  there  is  always  a 
hidden  reserve  of  loanable  funds,  consisting  of  such  part 
of  the  capital  and  surplus  profits  of  the  banks  as  is  not  in- 
vested in  circulation.  In  New  York,  this  hidden  reserve 
amounts  to  more  than  $300,000,000.  Imperfect  though  it 
be,  the  weekly  bank  statement  is  valuable,  because  it  af- 


POINTS  TO  BE  WATCHED  131 

fords  an  important  clue  to  the  actual  situation.  It  is 
closely  scanned  by  every  active  business  man. 

Public  attention  is  generally  fastened  upon  the  item  of 
surplus  reserves,  because  the  loaning  power  of  the  banks 
depends  upon  that  item.  A  serious  decline  in  reserves  in- 
dicates the  approach  of  high  money  and  leads  to  anticipa- 
tory selling  of  stocks. 

A  feature  of  equal  importance,  however,  is  the  item  of 
surplus  deposits.  Investors  are  advised  to  watch  the  dif- 
ference between  loans  and  deposits.  Normally,  the  de- 
posits should  exceed  the  loans.  In  dull  times,  they  always 
do.  In  New  York,  the  surplus  of  deposits  over  loans  rose 
in  1899  to  $144,000,000;  in  1904,  to  $110,500,000.  When 
an  abundance  of  money  is  indicated  by  the  magnitude  of 
surplus  deposits,  interest  rates  are  sure  to  be  low ;  and  one 
may  rely  upon  it  that  the  big  men  and  the  restless  spirits 
of  Wall  Street,  who  have  all  been  held  in  leash  by  a  pre- 
ceding period  of  low  reserves  and  high  money,  are  quietly 
preparing  for  a  bull  market  and  a  revival  of  business, 
even  if  the  movement  has  not  already  started.  The  banks 
always  promote  such  a  movement,  because  they  are  natur- 
ally desirous  of  higher  rates  of  interest  on  their  money. 
The  first  activity  may  be  in  the  direction  of  a  "  shake 
out"  in  stocks,  in  order  to  eliminate  the  existing  long 
interest  as  far  as  possible.  Within  a  few  months,  how- 
ever, a  bull  movement  will  be  found  to  be  under  headway 
and  coincidentally  a  revival  of  business  enterprise.  In  the 
tables  in  the  latter  part  of  this  book,  the  reader  will  see 
how  the  origin  of  a  bull  market  coincides  with  a  great 
surplus  of  money  in  the  New  York  banks. 

On  the  other  hand,  when  surplus  deposits  are  danger- 
ously low,  a  situation  is  revealed  which  may  and  com- 


132  HOW  MONEY  IS  MADE 

monly  does  foreshadow  a  serious  decline  in  stocks  or  an 
actual  crisis.  The  catastrophe  may  be  postponed  for  a 
year  or  more,  but  it  is  sure  to  arrive. 

In  New  York,  the  danger  line  is  in  the  vicinity  of  about 
$30,000,000  excess  of  deposits  over  loans.  When  surplus 
deposits  have  fallen  to  that  narrow  margin,  the  cause  may 
be  looked  for  in  the  activity  of  general  business  and  of 
the  speculators  in  Wall  Street ;  and  a  time  is  approaching 
when  call  loans  should  rise  above  4  and  5  per  cent.  When 
deposits  fall  below  zero,  (that  is,  when  they  are  less  than 
loans)  the  evil  day  has  dawned.  Interest  rates  are  then 
liable  to  go  to  10,  15,  or  even  25  per  cent  (and  higher)  on 
call  loans.  If  such  prohibitive  rates  are  avoided,  the  re- 
sult will  be  due  to  some  extremely  happy  circumstance  or 
the  concentrated  and  herculean  efforts  on  the  part  of  lead- 
ing bankers.  No  operator  or  pool  can  carry  stocks  on  a 
margin  profitably,  if  10  per  cent  or  more  is  charged  for 
call  loans.  At  such  times,  it  is  inevitable  that  stocks  will 
be  freely  sold.  What  happens  to  prices  at  such  junctures 
need  hardly  be  referred  to. 

Previous  to  the  resumption  of  specie  payments,  Jan.  1, 
1879,  an  excess  of  loans  over  deposits  was  the  chronic 
state  of  affairs  at  the  New  York  banks.  October  25,  1873, 
the  excess  of  loans  was  fully  $87,000,000.  Specie  had  been 
driven  out  of  the  country  in  enormous  amounts  by  paper 
money  inflation,  and  to  some  extent  had  been  hoarded  by 
individuals;  and  gold  formed  a  relatively  small  part  of 
the  cash  holdings  of  the  banks.  Great  bull^markets  had 
been  carried  on,  during  that  period,  through  the  use  of 
paper  money,  but  after  the  resumption  of  gold  payments 
the  country  was  on  a  different  basis.  Gold  gradually 
came  back  to  the  banks  and  deposits  tended  normally  to 


POINTS  TO  BE  WATCHED  133 

run  in  excess  of  loans.  Now,  taking  the  period  since 
Jan.  1,  1879,  deposits  have  fallen  below  loans  on  several 
occasions,  as  follows: 

1879  to  the  last  week  in  1883,  during  which  time  (with  the 
exception  of  a  few  weeks  in  1881)  loans  ran  higher  than  de- 
posits, every  week  of  each  year.  Interest  rates  were  high,  and, 
after  the  middle  of  1881,  stocks  declined  steadily  for  three  years. 
In  1884,  a  turn  in  affairs  took  place  and  thereafter  deposits  were 
normally  in  excess  of  loans  and  the  market  had  a  rising  trend. 

In  1887,  loans  and  deposits  nearly  balanced  the  entire  year; 
but  in  the  Fall,  loans  were  in  excess,  and  stocks  had  a  strong 
reaction. 

August  to  December,  1890,  when  leading  stocks  fell  an  average 
of  $20  a  share. 

May  and  September,  1891,  call  money  going  to  25  per  cent  in 
the  latter  month.  In  both  months,  a  moderate  downward  turn 
took  place  in  the  stock  market;  and,  as  the  banking  situation  did 
not  improve  sufficiently,  the  bull  market  culminated  in  February, 
1892. 

June  to  October,  1893,  call  money  rising  twice  to  74  per  cent 
and  stocks  falling  $20  to  $35  a  share,  while  a  crisis  and  panic 
was  sweeping  the  country. 

August  to  November,  1896,  when,  prices  being  already  low,  they 
went  lower  yet  and  reached  a  level,  on  the  average,  beneath  that 
of  any  period  for  the  preceding  twenty  years,  taking  the  stocks 
then  in  existence.  Call  money  was  quoted  as  high  as  127  per 
cent  in  October. 

October  and  December,  1902,  when  the  disastrous  reaction  of 
1903  was  coming  on.  Call  money  was  loaned  out  in  large  quanti- 
ties at  from  10  to  35  per  cent  during  this  time. 

All  of  1903,  except  January  and  February,  a  crisis  prevailing, 
and  stocks  tumbling  for  six  months,  although  the  liquidation  so 
relaxed  the  tension  that  call  money  went  no  higher  than  15  per 
cent  during  the  panic. 

October,  November  and  December,  1905,  and  the  whole  of  1906, 
save  three  weeks  in  January  and  February,  and  one  in  July,  call 
money  rising  to  125  per  cent  on  one  occasion,  and  high  rates  recurring 


134  HOW  MONEY  IS  MADE 

with  every  outbreak  of  activity  in  stocks  and  business.  This  has 
been  an  exceptional  and  remarkable  period,  and  seems  to  foreshadow 
disaster.  It  is  probable  that  brokers  and  operators  provided  them- 
selves with  time  money  at  reasonable  rates,  having  resolved  never  to 
place  themselves  at  the  mercy  of  the  banks,  again,  as  they  were  in 
1902.  The  bull  market  halted  more  than  once  and  there  were  several 
moderate  breaks  in  stocks.  Yet  general  business  continued  booming; 
and  the  pools  and  syndicates  marvellously  weathered  the  months  in 
question. 


A  noteworthy  fact  in  connection  with  the  matter  of  siuv 
plus  deposits  is  this,  that  loans  were  $39,000,000  more 
than  deposits  in  New  York  in  the  terrible  year  of  1893 ; 
$40,000,000  more  in  1903 ;  $24,000,000  more  in  the  latter 
part  of  1905 ;  and  over  $62,500,000  in  December,  1906. 

When  the  banking  situation  becomes  dangerous,  as  indi- 
cated by  the  diminution  of  surplus  deposits  and  especially 
after  they  have  fallen  below  zero,  a  man  who  believes  that 
the  bull  market  can  be  carried  yet  farther  and  a  reaction 
in  business  avoided  must  know  where  ample  supplies  of 
money  can  be  obtained.  If  foreign  trade,  deposit  of  Gov- 
ernment money  in  the  banks,  an  inflation  of  the  currency, 
a  flood  of  new  gold  from  the  mines,  extensive  foreign  pur- 
chases of  American  securities,  or  some  other  influence  can 
not  be  brought  into  play  to  recruit  the  exhausted  resources 
of  the  banks,  then  there  is  no  other  recourse  except  liqui- 
dation in  stocks  and  a  slowing  down  of  business  enterprise 
to  relieve  the  situation. 

It  is  sometimes  said  that  a  bull  market  is  possible  with 
high  money.  A  part  of  the  explanation  of  this  is  the 
fact,  that  recovery  in  stocks,  after  a  crash,  begins,  while 
the  banking  situation  is  yet  near  its  worst  but  when  im- 
provement is  clearly  in  sight  ahead. 


POINTS  TO  BE  WATCHED  135 

GOLD  PRODUCTION 

ACCORDING  to  Dr.  Adolph  Soetbeer,  an  authority  on  this 
subject,  not  more  than  about  $3,000,000  of  gold  was  added 
annually  to  the  world's  supply  up  to  the  time  of  the  dis- 
covery of  America.  When  the  Spaniards  began  to  take 
unto  themselves  and  send  to  Europe  the  riches  of  Peru 
and  Mexico,  the  annual  addition  to  the  world's  stock  of 
gold  was  larger  but  had  not  risen  above  an  average  of 
$14,000,000  a  year  up  to  1840.  Marshall's  find  in  Cal- 
ifornia and  the  discoveries  in  Australia  gave  an  impetus 
to  the  output  of  gold.  In  1860,  the  yearly  addition  to  the 
general  stock  of  gold  was  about  $140,000,000.  Many  of 
the  first  deposits  and  mines  having  been  worked  out,  the 
annual  production  fell  to  $115,000,000  in  1885. 

South  Africa  and  Alaska  have  since  come  into  play. 
According  to  George  H.  Roberts,  Director  of  the  Mint 
at  Washington,  gold  was  poured  into  circulation  in  1904 
to  the  amount  of  $347,150,700.  The  mines  are  now  even 
more  prolific  and  are  sending  out  more  than  $1,000,000  of 
the  metal  every  day.  The  output  in  1905  was  nearly 
$425,000,000. 

Students  of  finance  are  of  the  opinion,  that  the  great 
mass  of  gold  which  is  being  added  to  the  reserves  and 
coinage  of  the  civilized  world  will  tend  to  minimize  any 
serious  monetary  stringency  hereafter  and  will  have  the 
effect  of  a  mild  and  slow  inflation  of  prices  of  stocks  and 
all  commodities. 

Frank  A.  Vanderlip,  the  banker,  has  pointed  out  the 
startling  fact,  that,  at  the  present  rate  of  gold  mining,  the 
gold  coin  of  the  world  will  be  doubled  in  the  next  twenty 


136  HOW  MONEY  IS  MADE 

years.  It  now  amounts  to  $6,000,000,000.  Should  there 
be  no  interruption  in  the  stream  of  treasure  now  pouring 
into  the  mints,  the  effects  of  gold  inflation  are  likely  to  be 
more  rapid  in  coming  years. 

It  is  doubtful  if  an  enlargement  of  the  world's  stock  of 
gold  will  ever  prevent  periods  of  monetary  stringency. 
The  demands  of  governments  and  the  inexhaustible 
energy  of  business  men  will  always  keep  pace  fully  with 
banking  resources.  More  gold  may  however  minimize  the 

evil. 

% 

SOME  time  is  likely  to  elapse,  after  beginning  the  study  of 
broad  conditions,  before  an  investor  will  be  able  to  apply 
his  information  correctly  to  the  concrete  subject  of  the 
time  to  buy  and  sell  securities.  He  should  study  them 
diligently,  however,  and  the  exercise  will  prove  of  the 
utmost  service  in  the  course  of  time. 

The  main  point  is  to  discover,  as  far  as  possible,  in  good 
times,  the  approach  of  a  crisis  and  reaction  in  trade ;  and, 
in  bad  times,  the  coming  turn  for  the  better. 

Suppose  that  the  times  have  been  booming  for  a  few 
months  or  years !  Examine  now  the  less  obvious  facts  of 
the  situation!  Are  loans  in  excess  of  deposits?  Are 
interest  rates  high  ?  Are  financial  men  anxious  about  the 
supply  of  money?  From  what  direction  can  relief,  if 
any,  be  expected?  Are  corporations  in  the  market  for 
more  money,  at  the  very  time,  when  money  is  scarce ;  and 
are  new  issues  of  stock  and  bonds  being  launched,  enor- 
mous in  the  aggregate?  Are  wages  rising?  Are  the 
prices  of  commodities  high  ?  Have  stocks  been  bulled  to  a 
^eight  above  actual  investment  worth?  Is  foreign  trade 
good  or  the  reverse?  The  promise  of  the  crops,  is  it 


POINTS  TO  BE  WATCHED  137 

good  or  the  contrary?  Does  extreme  optimism  prevail 
and  is  personal  extravagance  seen  on  every  side?  Have 
there  been  serious  exposures  of  wrong-doing  and  fraud, 
and  is  there  reason  to  believe  that  more  are  forthcoming? 
Has  a  great  calamity,  like  the  Chicago  fire  or  the  San 
Francisco  earthquake  caused  a  tremendous  loss  of  capital 
and  impaired  the  financial  resources  of  the  country? 

Some  one  or  more  of  these  evil  factors  may  always  be 
present  in  affairs,  without  great  harm;  but  when  a 
majority  of  them  combine,  the  situation  is  growing 
dangerous;  and  a  prudent  man  will  get  out  of  stocks  on 
any  boom  in  the  market,  and  stay  out.  The  situation  is 
sure  to  be  doubly  precarious,  if  the  stock  market  has  had 
four  or  five  years  of  improvement  since  the  last  depres- 
sion, or  if  it  has  had  a  steady  rise  for  a  year  or  so,  without 
a  serious  reaction. 

Per  contra,  assume  that  a  reaction  in  trade  and  stocks 
has  lasted  for  one  or  two  years  at  least,  and  that  there 
has  been  thorough  and  severe  liquidation.  Failures  have 
been  heart-rending.  Mills  and  shops  have  reduced  their 
output,  thousands  of  workmen  have  been  discharged, 
stocks  of  goods  on  hand  have  declined,  and  general  re- 
trenchment has  been  enforced.  Now  look  at  the  resources 
of  the  banks !  Has  idle  money  accumulated  there  in  great 
stores?  Are  interest  rates  low?  Are  stocks  selling  on  a 
4,  4j^  or  even  5  per  cent  basis?  Has  the  stock  market 
reached  a  state  of  prostration,  where  bad  news  does  not 
suffice  to  send  prices  lower  ?  If  these  factors  are  all  pres- 
ent, then  an  investor  can  buy  back  his  stocks  at  any  time, 
without  waiting  for  the  final  drive  at  prices. 

Both  at  the  top  and  at  the  bottom  of  the  market,  several 
weeks  or  months  are  likely  to  elapse  before  there  is  any 


138  HOW  MONEY  IS  MADE 

important  change  in  prices.  An  investor  need  not  be  mis- 
led by  appearances.  If  he  has  bought  on  a  reaction,  and 
held  on  through  several  months  or  years,  and  has  a  good 
increment  on  the  value  of  his  stocks,  he  can  sell  when  the 
situation  is  dangerous,  with  absolute  equanimity.  At  the 
other  extreme,  he  can  buy.  In  both  cases,  he  must  resign 
himself  to  wait  for  several  months  or  a  term  of  years,  be- 
fore the  time  comes  for  him  to  take  action  anew  and  either 
buy  or  sell  his  favorite  stocks. 


X 

TUENING  POINTS  IN  THE  MAEKET 

HOW  THE  MARKET  ACTS  AT  TOP  AND  BOTTOM  OP  LONG  SWINGS.— THE 

ART  OF  MANIPULATION.— PHENOMENA  OF  BULL  AND  BEAR 

MARKETS. -CHARTS 

SOME  suggestions  have  been  made  in  a  previous  chap- 
ter, which  ought  to  aid  an  intelligent  man  to  form 
a   judgment   as   to   underlying   conditions.     Are   there 
phenomena  in  the  way  the  market  acts,  at  any  time,  which 
will  convey  an  additional  message,  with  reference  to  the 
propriety  of  buying  or  selling  his  stocks? 

If  any  suggestion  can  be  gleaned  from  this  source,  it  is 
of  the  utmost  importance  to  the  private  investor. 

Looked  at  broadly,  price  movements  in  the  stock  mar- 
ket go  in  long  swings.  Some  of  these  last  for  several 
months;  others,  barring  the  occasional  reactions,  for  sev- 
eral years.  A  rough  idea  of  the  movement  can  be  gained 
from  the  familiar  comparison  with  the  ocean  tide  rising 
upon  a  coast.  The  flood  advances  slowly  at  first  until  it 
has  made  some  headway ;  recedes  part  way ;  advances  to  a 
higher  level ;  again  recedes,  but  not  so  far  as  before ;  and 
then  again  advances,  finally  with  a  rush — the  surface  of 
the  ocean  broken  continually  by  huge  swells  and  the 
swells,  diversified  with  smaller  waves;  and  at  the  end  of 
the  whole  long  rise,  the  coast  beaten  by  heavy  billows. 
The  tide  then  turning  swiftly  and  falling  for  a  long  time, 

139 


140  HOW  MONEY  IS  MADE 

the  surface  broken  as  before,  and  at  the  bottom  of  the 
ebb,  the  waves  moderate  or  the  sea  almost  calm.  The 
comparison,  which  is  not  a  new  one,  must  be  qualified 
in  several  respects,  and  mainly  by  the  circumstance  that 
the  ebb  runs  more  swiftly  than  the  flow. 

The  great  swings  in  prices  correspond  with  the  cycles 
in  general  trade  and  industry;  but  they  begin  almost  in- 
variably before  there  is  any  important  change  in  affairs 
at  large. 

The  first  impulse  in  either  direction  is  apt  to  originate 
among  men  who  have  large  fortunes  invested  in  banks, 
railroads  and  factories,  and  whose  responsibilities  are  so 
vast,  that  they  are  compelled,  both  for  the  sake  of  their 
fellow  stockholders  and  themselves,  to  watch  closely  every 
sign  of  coming  changes,  which  may  affect  the  prosperity 
of  their  corporations.  They  are  the  first,  as  a  rule,  to  de- 
tect the  cloud  no  larger  than  a  man's  hand,  which  may 
overspread  the  sky.  They  are  the  first  to  note  the  first 
faint  streaks  of  promise,  which  herald  the  dawn  of  a  bet- 
ter day. 

Managers  of  the  railroads,  which  traverse  the  grain 
and  cotton  fields,  make  it  their  duty  to  be  acquainted  with 
the  condition  of  the  growing  crops  from  planting  to  har- 
vest. Various  interests  in  the  financial  world  have  an 
independent  service  of  their  own  for  collecting  the  same 
information.  Officials  of  iron  and  steel  companies  are 
alert  to  every  sign  of  a  slackening  or  a  more  insistent 
demand  for  material;  and  they  note  fresh  eagerness  on 
the  part  of  buyers,  or  a  cancellation  of  orders,  before  the 
public  are  aware  of  the  facts.  Bankers  are  necessarily  the 
first  to  mark  increasing  courage  on  the  part  of  merchants 
and  to  know  whether  they  foresee  good  or  bad  business 


TURNING   POINTS   IN   THE   MARKET      141 

ahead.  From  a  thousand  sources  of  information,  men  of 
large  means  learn  to  forecast  the  future  of  business  and 
of  earnings  (and  thus  of  stocks)  and  to  adapt  their  own 
course  to  the  coming  changes.  Most  of  the  information, 
not  all,  but  certainly  part  of  it,  is  placed  at  the  service 
of  the  public  by  the  financial  dailies  and  weeklies,  whose 
keen  and  educated  reporters  are,  from  professional  pride, 
as  anxious  to  be  the  first  to  unearth  and  publish  important 
data  of  this  class,  as  are  the  bankers  and  capitalists  to  ob- 
tain it.  If  they  do  not  get  every  important  fact  as  soon  as 
the  bankers  do,  they  are  at  any  rate  certain  to  discover  it 
soon  afterward  and  to  publish  it  to  the  world  in  time  for 
all  practical  purposes. 

Large  fortunes  have  been  made  through  the  prompt- 
ness with  which  men  of  wide  acquaintance  with  affairs 
have  addressed  themselves  to  the  future,  at  critical  pe- 
riods, no  matter  whether  the  spirit  of  the  moment  were  that 
of  the  deepest  gloom  or  the  most  unbounded  optimism. 

Quiet  buying  of  good  stocks  and  bonds  in  times  of  de- 
pression by  such  men,  and,  conversely,  quiet  selling  of 
such  securities  as  are  not  needed  for  control,  in  a  period 
of  enthusiastic  prosperity,  mark  the  true  turning  points 
of  the  market. 

But  such  men  are  not  by  any  means  the  only  active 
factors  in  the  stock  market.  Hundreds  of  keen,  able  and 
brilliant  men  buy  and  sell  stocks  for  the  profit  to  be  de- 
rived from  their  transactions;  and  among  them  are  sev- 
eral who  conduct  campaigns  of  great  magnitude,  for 
themselves  or  others. 

Some  of  these  men  aim  at  the  actual  control  of  corpora- 
tions and  may  in  the  end  retire  from  active  speculation  to 
become  sober  and  conservative  managers  of  properties. 


142  HOW  MONEY  IS  MADE 

Commodore  Vanderbilt  and  Jay  Gould  were  of  this  class ; 
but,  during  the  creation  of  their  fortunes,  those  two  men 
of  genius  were  daring  operators  in  stocks,  planning  and 
managing  great  campaigns,  although  they  were  compelled 
to  employ  many  brokers  to  carry  out  the  details.  At  the 
present  day,  James  K.  Keene,  John  W.  Gates,  Jacob  Field, 
and  a  few  others  of  kindred  abilities  are  the  leading  oper- 
ators. Thomas  W.  Lawson,  of  Boston,  should  be  added  to 
the  list.  They  have  all  grown  into  prominence  since  the 
Civil  War.  Nearly  all  are  members  of  the  local  stock  ex- 
changes, in  order  that  they  may  have  the  advantage  of  the 
smaller  rates  of  commission  on  purchases  and  sales  which 
prevail  among  fellow  members.  All  of  them  possess  for- 
tunes won  on  the  field  of  financial  battle.  In  the  course 
of  time,  all  of  them  will  retire  from  active  speculation; 
but  their  places  will  be  filled  by  younger  men;  and  as  a 
force  in  stocks,  the  independent  operators  will  always 
have  to  be  reckoned  with.  Through  long  experience,  they 
have  become  expert  manipulators  of  the  market;  and 
their  talents  in  this  direction  lead  to  the  employment  of 
some  of  them,  from  time  to  time,  by  great  financiers,  for 
the  conduct  of  important  campaigns  in  stocks. 

Easily  the  prince  of  them  all  is  James  R.  Keene,  a  man 
of  cool,  sound,  alert  intellect,  hard  as  steel,  brilliant  in  exe- 
cution, patient,  and  amazing  in  the  extent  and  variety  of 
his  information.  Long  a  successful  manager  of  bear  cam- 
paigns on  his  own  account,  and  perhaps  better  fitted  by 
temperament  for  that  side  of  the  market,  Mr.  Keene  took 
the  bull  side  in  1901 ;  and  it  was  he  who  marketed  United 
States  Steel,  common,  at  from  $45  to  $55  a  share.  His 
other  achievements  have  been  remarkable. 

It  is  such  men  as  these  who  undertake  the  actual  man- 


TURNING  POINTS  IN  THE  MARKET      143 

agement  of  bull  and  bear  campaigns.  The  market  reflects 
their  operations  and  purposes. 

It  is  to  be  noted  that  a  campaign  in  stocks  is  a  real  and 
serious  matter.  If  the  security  market  did  nothing  ex- 
cept reflect  leisurely  Buying  and  selling  by  actual  inves- 
tors, it  would  seldom  move  rapidly  in  one  direction  or  the 
other.  But  the  market  is  not  left  to  itself  in  this  way. 

Whether  arising  from  the  impatience  of  the  American 
temperament,  or  from  a  desire  natural  to  all  men  to  have 
a  thing  over  with  and  to  attain  results  quickly,  it  is  a 
fact,  that  whenever  the  force  of  circumstances  dictates 
either  a  serious  reaction  or  a  rising  market,  men  do  not 
wait  to  let  events  take  their  natural,  slow  and  orderly 
course.  They  promote  the  movement,  with  a  view  to  pro- 
ducing tangible  results  as  soon  as  possible.  For  any  such 
campaign,  a  number  of  important  and  delicate  details 
must  be  arranged.  Nothing  is  left  to  chance.  Nothing 
is  done  hap-hazard.  So  far  as  is  possible,  every  contin- 
gency is  foreseen  and  provided  for. 

No  operator  can  go  on  the  floor  of  an  exchange  and  do 
all  the  buying  and  selling  himself — at  any  rate,  without 
revealing  his  plans  to  a  certain  extent.  A  number  of 
brokers  must  therefore  be  employed.  Each  member  of  a 
pool  must  be  instructed  also,  concerning  the  part  he  is  to 
play  in  the  buying  and  selling.  Private  inquiries  must  be 
made,  which  will  bring  to  light,  as  far  as  practicable,  the 
extent  of  the  existing  long  or  short  interest  in  stocks.  It 
is  also  necessary,  in  some  cases,  to  arrive  at  an  under- 
standing with  the  large  owners  of  a  given  stock,  which  is 
about  to  be  manipulated.  The  plotting  of  a  campaign 
involves  a  thousand  other  details.  Oyama,  fighting  his 
way  into  an  enemy's  country,  never  had  a  greater  variety 


144  HOW  MONEY  IS  MADE 

of  preparations  to  make,  than  James  R.  Keene,  in  charge 
of  a  great  campaign  in  stocks.  The  pools,  also,  consult 
frequently  and  act  together. 

No  bull  market  will  ever  be  undertaken  until  underly- 
ing conditions  are  ripe  for  one.  There  must  be  ample  sup- 
plies of  money,  interest  rates  must  be  moderate,  and 
liquidation  virtually  ended.  It  is  upon  these  points,  that 
an  investor  should  fasten  his  attention.  With  reference 
to  the  banking  situation,  no  one  need  ever  be  in  the 
slightest  doubt.  In  June,  1904,  for  example,  when  sur- 
plus deposits  in  New  York  were  $75,000,000  (they  after- 
ward rose  to  $110,500,000)  when  time  loans  were  not 
higher  than  3  per  cent  and  call  money  1  to  \l/2  per  cent, 
the  flag  had  already  been  waved  for  a  start  in  a  bull  mar- 
ket. Every  man  could  have  read  that  sign  for  himself. 

As  for  liquidation,  in  any  year,  its  conclusion  is  likely 
to  be  made  public  soon  afterward.  Brokers  who  issue 
market  letters,  newspapers  which  comment  on  market  fac- 
tors, and  advisory  houses  which  make  it  a  business  to 
guide  clients  in  the  buying  and  selling  of  stocks,  are 
reasonably  certain  to  know  when  liquidation  has  practi- 
cally come  to  an  end. 

When  the  ground  work  is  laid,  as  above  indicated,  for  a 
rising  market,  an  investor  should  consider  the  propriety 
of  buying  back  the  stocks  he  has  sold  on  a  previous  swing 
upward. 

The  first  care  of  the  leader  of  the  bulls  is  to  make  sure, 
so  far  as  in  him  lies,  that  every  speculative  long  account 
has  been  sold  out,  or  that  the  stock  will  not  be  thrown 
on  the  market  at  an  embarrassing  moment,  and  that  the 
petty  traders  and  the  public  have  been  pretty  well  shaken 
out.  Prices  are  kept  weak  and  made  to  look  as  though 


TURNING  POINTS   IN   THE   MARKET      145 

destined  to  go  lower  yet.  The  woman  who  bought,  from 
the  proceeds  of  a  Pullman  dividend,  one  share  of  United 
States  Steel,  common,  around  $20,  as  her  private  specu- 
lation, and  sold  it  in  despair  at  $9,  just  as  the  bull  market 
of  1904  was  about  to  begin,  was  a  perfect  type  of  a  great 
class  of  people,  rich  and  otherwise,  whose  holdings  the 
manipulator  wishes  to  have  liquidated,  before  aggressive 
bull  tactics  are  resorted  to.  This  is  one  reason,  why  the 
very  first  act,  after  improvement  has  actually  set  in,  is 
often  to  put  stocks  lower  than  before. 

Thousands  of  small  traders,  and  investors  who  are  at 
sea  about  Wall  Street  methods,  may  have  held  through 
the  final  dip  in  prices;  but  it  will  not  be  an  absurd  ex- 
pectation that  they  will  hasten  to  sell  on  the  first  impor- 
tant rise.  As  these  people  have  been  proof  against  fright, 
an  effort  will  be  made  to  tire  them  out.  This  policy  ex- 
plains why,  after  the  market  has  had  a  long  and  contin- 
uous decline,  it  is  apt  to  remain  utterly  inert  and  para- 
lyzed for  weeks  and  even  months.  Great  operators  do 
nothing  in  a  hurry;  they  have  infinite  patience.  During 
this  period,  prices  fluctuate  feebly  and  uncertainly. 
Quick  slumps  follow  the  rallies.  A  few  stocks  are  put 
to  new  low  records,  even  while  the  balance  of  the  list  is 
edging  its  way  unobtrusively  upward.  Many  owners  of 
stocks  have  been  in  the  habit  of  selling  at  such  a  time  as 
this,  tired  out,  disgusted,  and  fearful  of  even  greater 
losses.  Exactly  when  they  ought  to  buy,  they  sell.  It  is 
what  the  operator  wishes.  After  the  situation  has  been 
liquidated  as  thoroughly  as  possible,  active  operations 
for  the  rise  begin. 

The  small  investor  needs  to  wait  patiently  and  watch 
carefully  for  such  periods  as  these,  which  are  turning 


146  HOW  MONEY  IS  MADE 

points  in  the  market,  and  are  called  and  actually  have 
the  character  of  " periods  of  accumulation."  Banks, 
pools  and  the  "big  men"  are  buying,  whether  they  ad- 
vertise the  fact  to  the  world  or  not.  Low  interest  rates, 
ample  money  supplies,  and  a  sold-out  stock  market  are 
irresistible  temptations  to  organize  an  upward  movement. 
When  bad  news  no  longer  drives  prices  down,  and  under- 
lying conditions  are  all  right,  the  bear  market  is  ended. 

In  the  early  stages  of  a  bull  market,  many  devices  are 
resorted  to,  having  for  their  object  to  mystify  the  public 
and  prevent  them  from  buying  stocks.  So  far  as  the  pools 
have  the  power  to  do  so,  they  withhold  from  view  the 
favorable  features  of  the  situation.  Heads  are  shaken 
and  pessimistic  comments  somehow  creep  into  the  news- 
papers. Rumors  of  lower  prices  are  afloat.  Something 
seems  to  be  "hanging  over  the  market"  and  small  buyers 
are  unconsciously  led  to  "wait  until  the  situation  clears 
up  a  little. ' '  Meanwhile,  the  formation  of  a  short  interest 
is  sedulously  cultivated. 

In  due  time,  prices  are  shot  upward  a  few  points  in  two 
or  three  days.  Those  who  are  short  wait  to  see  what  this 
means.  Buyers  think  they  will  now  go  in,  on  the  next  re- 
action. In  only  too  many  cases,  a  reaction  never  comes; 
and  if  it  should  do  so,  it  is  so  abrupt  and  unexpected, 
that  buyers  are  frightened  and  do  not  go  in  at  all. 
Traders  may  even  go  short  a  little  more. 

Two  or  three  stocks  are  taken  hold  of,  now,  and  ad- 
vanced, generally  the  high-priced  ones,  of  which  there  is 
a  limited  supply  in  the  Street  and  of  which  the  general 
public  have  little  or  none.  Later,  another  group  is  ad- 
vanced. The  "cats  and  dogs"  have  their  turn  in  time. 
Then  the  standard  stocks  are  again  bulled.  It  is  at  this 


TURNING  POINTS  IN  THE  MARKET      147 

stage  of  the  rise  that  a  good  manipulator  shows  to  the 
best  advantage.  He  keeps  the  market  rising  and  gives 
it  an  appearance  as  if  the  rise  were  nearly  over.  Yet  the 
tide  continues  to  flow  and  a  new  "high  record"  is  made 
every  week  or  two  by  various  good  stocks.  All  these  pro- 
ceedings may  have  consumed  several  months.  Finally,  in 
despair,  thousands  of  buyers  rush  in  and  pick  up  their 
favorite  stocks,  sometimes  just  as  the  market  is  nearing 
its  top  for  the  time  being.  This  is  precisely  the  end  at 
which  the  manipulator  has  been  aiming.  The  market  is 
kept  active.  Million-share  days  and  even  two-million- 
share  days  are  witnessed  at  the  Stock  Exchange.  "Now, 
at  last  we  have  a  great  bull  market. ' '  Under  cover  of  the 
excitement,  pools  and  operators  unload  their  long  stock  on 
belated  buyers  or  the  wildly  enthusiastic  traders,  and 
maneuver  for  a  ten  to  thirty  point  downward  swing. 

At  this  critical  period,  a  variety  of  devices  are  em- 
ployed to  restrain  the  public  from  selling.  Dividends  may 
be  raised  on  popular  stocks.  Eights  may  be  given  on 
others.  Gold  may  J5e  imported.  Rumors  abound  that 
certain  stocks  are  "going  up  ten  points "  or  more.  Often, 
non-dividend  payers  and  "wild-cat"  stocks  and  even  the 
great  high-priced  stocks  are  actually  sent  up,  to  give  cre- 
dence to  the  rumors.  Finally,  when  a  strong  break  comes, 
high  money  or  some  other  plausible  influence,  temporary 
in  its  nature,  is  put  forward  as  an  excuse,  and  the  break 
is  even  utilized  to  induce  the  public  to  buy  more  stock. 

This  is  an  important  moment  for  an  investor.  Again  he 
must  study  the  banking  situation  and  all  the  other  points 
which  need  to  be  watched.  A  market,  which  will  not 
advance  farther  on  good  news,  is  over  with.  Too  much 
good  news  is  always  a  bad  sign,  because  the  good  news 


148  HOW  MONEY  IS  MADE 

is  apt  to  be  saved  for  the  culmination  of  a  bull  market 
Many  wise  men  sell  out  on  general  principles  when  the 
news  is  too  good.  If  the  newspapers  are  all  bullish,  if 
you  hear  from  all  your  friends  that  stocks  are  going  ten 
or  twenty  points  higher,  if  even  your  clergyman  and  other 
persons  who  are  entirely  exempt  from  suspicion  of  an 
intentional  desire  to  mislead,  help  swell  the  chorus,  the 
time  has  arrived  to  sell  out,  especially  if  the  market  has 
had  a  long  and  continuous  rise.  And  this  has  always 
been  true,  no  matter  whether  the  market  went  a  little 
higher  afterward  or  not.  Too  much  good  news,  tremen- 
dous volume  of  transactions  at  the  Exchange,  and  univer- 
sal bullish  enthusiasm  mark  the  culmination  of  a  bull 
movement. 

When  prices  can  be  put  up  no  farther,  rely  upon  it, 
that  the  operators  are  getting  ready  to  put  them  down. 
No  matter  whether  such  a  proceeding  is  harmful  to  busi- 
ness interests,  no  matter  whether  it  actually  brings  on  a 
great  crisis,  the  writer  is  only  stating  the  fact.  A  market 
which  is  going  up  no  farther  is  certainly  going  down ;  and 
the  speculators  combine  to  carry  the  decline  as  far  as  pos- 
sible, in  order  to  reap  a  harvest  of  profits  on  the  short 
side  of  the  market. 

When  a  bear  campaign  begins,  traders  go  short  of 
stocks.  To  do  this  to  advantage,  they  are  obliged  to  sus- 
tain prices  for  a  time,  while  selling  more  than  they  buy. 

One  of  the  conspicuous  tests  of  a  successful  operator  is 
the  ability  to  sell,  while  apparently  Buying.  It  may  seem 
incredible  that  this  can  be  done,  yet  it  is  an  every  day 
performance.  "Washed  sales "  or  "matched  orders" 
are  one  of  the  agencies,  through  which  the  object  is  at- 
tained. Orders  are  telephoned  simultaneously  to  several 


TURNING  POINTS  IN  THE  MARKET      149 

brokers.  Some  of  them  are  directed  to  sell,  others  to  buy. 
Each  broker  rushes  to  the  post  and  executes  his  order, 
none  of  them  aware  of  the  orders  of  the  others  or  ttfat 
they  all  emanate  from  the  same  source.  If  his  work  is 
skillfully  done,  the  operator  ends  each  day  in  an  im- 
proved position,  having  sold  more  than  he  bought,  and 
the  public  no  wiser  or  actually  mystified.  They  may  not 
do  these  things  in  Utopia.  But  this  is  the  United  States. 
Not  long  ago,  it  required  washed  sales  of  300,000  shares  to 
get  rid  of  30,000  Southern  Railway  stock  near  the  top  of 
the  market. 

While  the  insiders  are  getting  out  of  stocks  and  going 
short  at  the  top  of  the  market,  it  is  usual  for  a  few  se- 
lected stocks  to  be  bulled  to  much  higher  figures,  to  attract 
attention  and  conceal  the  real  designs  of  the  big  specula- 
tors. In  1903,  just  before  the  great  break  began,  heavy 
advances  took  place  in  Delaware  &  Hudson,  Southern 
Pacific,  General  Electric,  Missouri  Pacific  and  People's 
Gas.  Meanwhile,  the  professionals  were  all  getting  short 
of  their  favorite  stocks. 

At  the  proper  moment,  all  operations  for  the  rise  come 
to  an  end.  Lacking  their  former  support,  prices  com- 
mence slowly  to  fade  away.  Slow  and  feeble  rallies  are 
succeeded  by  rapid  dips,  in  which  prices  go  a  little  lower 
than  before.  "When  the  decline  has  imperiled  the  ten 
point  margins  of  stubborn  and  skeptical  traders,  more 
margin  is  called  for  by  the  brokers  with  the  inevitable 
result  that  a  quantity  of  stock  is  thrown  overboard.  A 
quick  slump  is  the  consequence.  In  due  time,  heavier  sell- 
ing breaks  out  and  the  bear  market  is  under  full  head- 
way. Finally,  the  twenty  point  margins  are  exhausted, 
more  stocks  are  thrown  over  regardless  of  price,  and  there 


73 

SOUTHERN  PACIFIC 
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SOUTHERN  PACIFIC 
Fluctuations  in   I9O5  continued 


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152  HOW  MONEY  IS  MADE 

is  another  smash.  Every  outburst  of  liquidation  carries 
the  market  farther  down.  From  time  to  time,  traders  who 
are  short  cover  their  commitments  and  there  is  a  smart 
but  short-lived  rally.  On  these  rallies,  the  pools  sell 
more  stock.  One  terrifying  break  succeeds  another,  until, 
after  months  of  confusion  and  loss,  the  bear  market 
culminates  and  prices  are  again  at  the  end  of  their 
swing. 

At  the  psychological  moment,  the  strong  come  forward 
again,  take  hold  and  support  the  market  by  their  pur- 
chases and  the  whole  story  is  repeated. 

It  is  the  periods  of  accumulation  and  distribution,  each 
one  covering  several  months,  which  an  investor  must 
watch  for.  He  will  be  aided  by  close  attention  to  under- 
lying conditions  and  by  the  comments  of  conservative 
newspapers  and  bankers.  An  investor  will  lose  nothing 
by  training  his  mind  to  a  habit  of  cynicism.  In  the 
famous  Joe  Millerism,  the  courtier  was  warned  not  to  be- 
lieve all  he  heard  at  the  French  court.  An  investor  must 
not  believe  all  he  hears  in  Wall  Street.  He  must  look  at 
the  future  and  judge  whether  the  times  ahead  are  favor- 
able to  stocks  or  the  contrary.  Wall  Street  always  dis- 
counts the  future.  This  he  must  learn  to  do  also. 

A  clue  to  turning  points  in  the  market  is  sometimes 
afforded  by  charts.  An  investor  is  advised  not  to  make 
a  fetich  of  charts,  as  so  many  small  traders  do  in  Wall 
Street.  It  would  be  absurd  to  suppose  that  the  whole 
meaning  of  the  market  can  be  read  in  charts.  On  the 
other  hand,  they  are  a  graphic  representation  of  what 
stocks  are  doing;  and  they  show  at  a  glance  whether  a 
given  stock  is  cheap  or  high.  An  investor  can  obtain  the 
material  with  which  to  make  a  chart,  by  taking  a  news- 
paper which  prints  a  detailed  list  of  all  the  sales,  each 


TURNING  POINTS  IN  THE  MARKET       153 

day,  on  the  New  York  stock  exchange.  The  chart  should 
be  kept  in  the  form  of  the  sample  one  hereto  appended. 

A  chart  shows  where  a  stock  stands  at  any  stage  of  the 
movement  then  in  progress.  If  it  is  high,  that  is  not 
necessarily  a  sign  that  it  will  not  go  higher.  If  it  is  low, 
it  may  go  lower  yet.  But  periods  of  accumulation  and 
distribution  are  generally  indicated.  A  number  of  swings 
and  turns  at  the  top  of  a  long  rise,  and  especially  a  strong 
dip  downward  and  a  rally  back  to  about  the  same  high 
figures  again,  are  held  to  signify  distribution.  At  the  bot- 
tom, which  is  commonly  better  defined  than  the  top,  a 
number  of  movements  back  and  forth,  with  a  rally  of  sev- 
eral points  and  a  return  to  about  the  lowest  figures,  is  a 
sign,  as  a  rule,  that  accumulation  is  going  on  and  that  in 
due  time  a  strong  rise  will  follow. 

Those  who  pin  their  faith  entirely  to  charts  believe  that 
"double  tops"  and  "double  bottoms "  are  the  thing  to 
look  for.  There  is  something  in  this;  but  it  will  not  do 
to  rely  absolutely  upon  the  pools  and  operators  showing 
their  hand  too  plainly  through  the  charts.  The  main  point 
is,  that  when  a  high  top  is  made,  followed  by  a  decline, 
and  the  market  rallies  back  to  the  top  and  refuses  to  go 
through,  then  that  is  proof  that  too  much  stock  is  for  sale 
there  and  distribution  is  evident.  At  the  bottom,  when  a 
return  to  low  figures  has  taken  place  and  the  stock  refuses 
to  go  much  if  any  lower,  then  buying  is  indicated.  The 
chart  must  be  looked  at  broadly  and  must  be  considered 
with  reference  to  underlying  conditions  and  the  general 
situation. 

Ruled  paper  can  be  bought  in  stores  where  mathemati- 
cal supplies  are  kept,  especially  for  the  keeping  of  charts. 


XI 

DULL  DAYS  IN  STOCKS 

'.PHEIR  MEANING  AND  WHAT  THEY  PORTEND— A  FEW  NOTEWORTHY 
EXAMPLES 

4  PHENOMENON  which  is  witnessed  in  Wall  Street, 
J\.  at  intervals,  and  which  is  full  of  significance,  is  the 
recurrence  of  exceptionally  dull  periods  in  the  trading. 

From  time  to  time,  there  happens  a  week  or  a  month, 
during  which  the  market  wends  its  slow  way  along  as 
sluggishly  as  a  muddy  brook  crosses  a  flat,  when  traders 
are  tired  beyond  expression,  and  the  public  seem  to  have 
lost  all  interest  in  securities  of  every  description. 

Few  of  the  real  phenomena  of  the  Street  are  without 
meaning;  and  to  veterans,  these  dull  periods  are  highly 
significant. 

They  are  not  to  be  confounded  with  the  mid- Summer 
and  mid- Winter  halts  in  the  market.  Trading  is  usually 
at  a  low  ebb,  twice  a  year,  on  the  first  occasion  because 
of  the  vacation  absences  of  a  throng  of  traders  and  oper- 
ators, and  in  December,  owing  to  the  distractions  of  the 
holidays.  The  phenomenally  dull  periods  may  coincide 
with  one  or  the  other  of  these  halts,  now  and  then;  but 
what  we  are  considering  here  is  something  different  from 
the  normal  mid- Summer  and  mid-Winter  dull  days. 

Citing  the  unusual  periods,  first,  it  may  be  said  that 

154 


DULL  DAYS  IN  STOCKS  155 

intense  dullness  in  the  stock  market  has  preceded  a  serious 
[break  in  prices,  twice  during  the  last  fifteen  years. 

In  1890,  a  prosperous  and  fortunate  year  in  the  early 
months,  few  clouds  were  visible  on  the  financial  horizon, 
except  in  the  always  troubled  region  of  politics.  The 
usual  January  rise  and  reaction  had  been  followed  by  a 
good  Spring  rally,  running  into  May.  July  was  duller 
than  common.  The  Silver  Purchase  act  was  under  dis- 
cussion and  became  a  law  in  that  month.  Many  traders 
in  stocks  had  an  idea  that  what  the  farmers  believed 
might  be  true,  that  inflation  of  the  currency  would  boom 
prices  of  stocks  and  commodities  both.  There  was  a  pause 
to  consider  the  situation.  In  July,  sales  at  the  New  York 
stock  exchange  fell  to  an  average  of  only  83,400  shares 
a  day.  Conservative  men  feared  the  consequences  of  the 
silver  law  and  stopped  buying.  Farther,  the  crops  were 
not  in  good  shape,  owing  to  dry  weather.  The  hesitation 
in  the  market  foreran  a  fall.  Europe  was  disturbed  by 
our  silver  legislation  and  had  troubles  of  its  own  besides. 
When  prices  began  to  move,  they  fell;  and  with  the  ex- 
ception of  an  extremely  mild  rally  in  August,  an  almost 
unbroken  decline  took  place,  lasting  the  remainder  of  the 
year  and  ending  in  a  violent  smash.  Intense  dullness  in 
1890,  therefore,  signified  an  alteration  in  underlying  con- 
ditions for  the  worse  and  foreshadowed  a  bear  market. 

Another  such  instance  was  the  extraordinary  dullness 
in  the  Spring  and  Summer  of  1896.  After  the  Spring 
rally,  the  market  fell  into  the  doldrums.  May  27th  of 
that  year  is  often  referred  to  as  almost  a  record  day  of 
only  65,700  shares.  Prices  had  come  up  nicely  from  the 
low  figures  of  1895 ;  but  1896  was  a  terrible  year  and  any 
hesitation  in  the  upward  movement  was  an  unfavorable 


156  HOW  MONEY  IS  MADE 

feature.  Apathy  for  a  month  or  more,  at  a  season  when 
the  market  is  normally  active,  was  succeeded  by  a  heavy 
drop  in  prices ;  and  the  great  break  of  August  carried  the 
level  of  the  market  down  to  the  lowest  point,  known  to 
the  present  generation  of  active  men.  To  all  appearances 
that  low  level  will  never  be  seen  again,  unless  in  conse- 
quence of  some  catastrophe  in  national  affairs  not  now 
dreamed  of. 

These  two  cases  are  the  only  ones  of  importance  within 
fifteen  years,  in  which  an  entire  paralysis  of  the  trading 
was  the  forerunner  of  a  serious  decline  in  prices. 

As  a  rule,  intense  dullness  precedes  a  strong  movement 
upward,  no  matter  at  what  level  the  market  is  standing. 

In  1891,  1893  and  1894,  the  notable  periods  of  stagna- 
tion coincided  with  the  Summer  vacation  period.  Condi- 
tion of  the  crops  played  no  certain  part  in  the  dullness 
of  those  months.  Crops  were  excellent  in  1891,  poor  in 
1893,  and  good  in  1894.  July  was  practically,  in  each  of 
those  years,  the  lowest  point  so  far  as  prices  were  con- 
cerned. In  the  week  ending  June  30,  1894,  sales  did 
not  go  above  576,000  shares,  making  it  probably  the  dull- 
est full  week  of  the  present  generation.  On  July  3d,  sales 
were  60,200  shares.  What  that  meant  to  brokerage  offices 
may  easily  be  imagined.  Seats  on  the  stock  exchange 
suffered  in  value  and  pessimism  was  so  rampant  that 
many  brokers  thought  their  seats  would  be  useful  there- 
after only  as  heirlooms.  In  each  of  the  years  named,  the 
stagnation  was  far  greater  than  was  normal.  It  indit 
cated  definitely  an  end  of  liquidation,  and  was  the  pre- 
cursor of  booms  in  prices,  which  started  when  activity 
returned  and  gained  momentum  later. 

In  1895,  the  smallest  volume  of  transactions  was  in 


DULL  DAYS  IN  STOCKS  157 

January  and  February.  Sales  averaged  about  120,000  shares 
a  day.  Utter  and  hopeless  inertia  settled  down  upon  the 
market.  No  broker  earned  his  salt.  This  was,  however, 
the  end  of  a  seven  months'  decline,  liquidation  was  over, 
the  situation  had  cleared  up,  and,  with  trifling  reactions, 
prices  rose  then  until  September. 

In  1900,  when  the  average  of  railroad  stocks  was  higher 
than  at  any  time  for  ten  years  (except  for  a  few  weeks 
in  1892  and  1899),  the  month  of  August  was  excessively 
dull.  Drouth  had  affected  the  wheat  crop  and  the  allied 
armies  were  besieging  Peking.  Aug.  22d  sales  amounted 
only  to  86,000  shares.  The  average  for  the  month  was 
about  150,000  shares  a  day.  On  the  worst  six  days,  trading 
reached  a  total  of  only  672,000  shares.  The  intense  dull- 
ness of  August  meant  that,  after  a  run  of  twelve  months, 
liquidation  had  completed  its  course.  Stocks  were  in 
strong  hands.  Important  interests  were  maturing  plans 
for  a  bull  market;  and,  after  a  short  and  sharp  shake- 
out,  there  followed  a  steadily  rising  market  until  the  May 
panic  of  1901.  This  was  a  typical  case  of  the  usual 
sequence  of  great  dullness  in  the  stock  market. 

In  the  exciting  bull  market  of  1902,  the  dull  month 
was  June.  In  one  week,  sales  did  not  go  above  1,325,000 
shares.  The  public  were  being  subjected  to  the  tiring 
out  process.  The  bull  party  had  a  tight  rein  on  prices; 
and  men  who  were  shrewd  enough  to  put  the  proper  inter- 
pretation on  the  phenomenal  dullness  of  June  were  lifted 
to  wealth  before  the  frosts  came.  June  was  the  month 
just  before  the  great  upheaval  in  prices  of  good  railroad 
stocks  to  prices  three  and  four  times  greater  than  the 
figures  at  which  they  sold  in  1896. 

March  10,  1904,  was  the  smallest  day  in  eight  years. 


158  HOW  MONEY  IS  MADE 

The  smash  of  1903  was  ended.  A  fine  rally  into  January 
had  taken  place  and  then  prices  drooped  nearly  to  the 
low  level  of  1903.  Prices  held  their  own  but  there  was 
no  buying.  During  the  last  week  of  April,  only  1,070,000 
shares  were  dealt  in.  June  28th,  sales  of  87,900  shares 
only  were  reported.  As  a  matter  of  fact,.  March  was  the 
turning  point  in  the  market.  Liquidation  had  ended. 
The  Northern  Securities  case  had  been  decided  (against 
the  Union  Pacific  interests)  and  the  bad  news  did  not 
depress  the  market  farther.  A  realizing  sense  of  the 
situation  finally  dawned  on  the  bear  party,  which  hastened 
to  cover  its  short  sales.  A  new  era  of  higher  prices 
dawned  on  Wall  Street;  and  since  then,  the  market  has 
risen  to  the  highest  point  ever  known,  exceeding  the  high 
average  of  1864. 

Phenomenal  dullness  reigned  in  Wall  Street  in  June, 
1905.  A  good  reaction  had  occurred  in  May  and  prices 
had  started  upward  again.  Such  persons  as  had  not  sold 
their  long  stock  during  the  previous  break  were  tired  out, 
as  far  as  possible,  by  a  dullness  and  apathy  which  seemed 
to  presage  another  fall.  During  the  week  ending  June 
17th,  total  sales  on  the  New  York  exchange  amounted  only 
to  1,800,000  shares  or  so,  little  more  than  one  full  day's 
business  in  times  of  active  manipulation.  On  the  15th, 
129,000  shares  were  done.  Drowsiness  fell  upon  the 
market,  the  stock  ticker,  and  all  things  animate  in  Wall 
Street.  On  the  17th,  Saturday,  83,000  shares  were  dealt 
in.  Since  then  we  have  had  over  a  million  shares  on  a 
Saturday.  On  the  17th,  St.  Paul  changed  in  price  just 
%th  of  a  point;  Union  Pacific,  J^th;  and  United  States 
Steel,  preferred,  ^ths— all  magnificent  stocks  whose  enor- 
mous volume  on  an  active  day  is  a  feature  of  the  furious 


DULL  DAYS  IN  STOCKS  159 

trading.  That  was  the  record  for  dullness.  There  could 
be  nothing  worse  than  that.  There  never  was  anything 
worse  except  perhaps  on  March  12,  1888,  the  famous  day 
of  the  blizzard,  when  practically  no  business  was  done  on 
the  exchange,  sales  being  only  15,250  shares.  The  stagna- 
tion of  June,  1905,  meant,  what  it  usually  does,  a  strong 
movement  upward  as  soon  as  activity  returned. 

Enough  has  been  said  to  show  the  importance  of  watch- 
ing for  periods  of  remarkable  dullness  in  the  stock  mar- 
ket. They  form  turning  points.  It  is  imperative  at  such 
times  to  search  closely  into  underlying  conditions.  If 
those  conditions  are  sound,  a  great  rise  is  ahead.  If  they 
are  dangerous,  there  may  be  a  flicker  upward  just  after 
the  resumption  of  active  trading,  but  the  market  is  bound 
toward  a  lower  level. 

It  may  be  remarked,  incidentally,  that  the  top  of  a 
bull  market  is  commonly  attended  with  great  excitement 
in  the  trading,  an  enormous  volume  of  sales,  and  wild 
and  erratic  movements  in  prices. 

With  reference  to  intervals  of  dullness  in  the  trading, 
it  may  also  be  said  that  the  same  phenomenon  is  watched 
for,  each  day,  By  those  who  wish  to  profit  by  small  turns 
in  prices.  If,  on  a  rally,  active  trading  stops  or  falls  dull 
for  an  hour  or  more,  that  is  generally  held  to  signify  a 
coming  turn  downward  of  a  few  points.  Per  contra,  if 
trading  falls  dull,  after  a  break,  and  prices  refuse  to  go 
any  lower,  those  who  are  short  cover  at  once  and  play  for 
an  upward  turn. 


XII 

WHEN  TO  BUY  SECURITIES 

DOCTRINE   OP    FIVE-YEAR   AVERAGES.— REACTIONS    HALF-WAY   BACK.— 
RULES  FOR  BUYING  ARRANGED  AND  CODIFIED 

IT  is  taken  for  granted,  that  an  investor  has  sold  some, 
or  all,  of  his  stocks  at  high  prices  during  a  boom,  and 
wishes  to  recover  them  lower  down,  or  that  he  has  come 
into  the  possession  of  surplus  funds,  which  he  wishes  to 
invest  safely  and  profitably. 

It  is  also  presumed  that  he  will  confine  his  attention 
to  standard,  respectable  and  long  established  securities, 
which  will  afford  him  a  regular  income;  and  that  he 
knows  what  they  have  sold  for  in  recent  years,  their  rates 
of  dividend,  earnings  and  surplus  profits,  and  in  a  general 
way  the  financial  standing  of  the  companies  in  other  re- 
spects. All  this  is  fundamental. 

To  determine  for  one's  self  the  proper  time  to  invest 
in  securities  requires  a  study  of  the  matters  outlined  on 
the  previous  pages  of  this  book,  the  lessons  to  be  learned 
from  which  will  now  be  set  forth,  even  at  the  risk  of  a 
little  repetition. 

An  investor  should  seldom  be  in  a  hurry.  By  waiting 
a  few  months  or  even  a  year,  and  by  proceeding  in  a 
perfectly  cool  and  matter  of  fact  way,  he  will  sometimes 
buy  a  favorite  stock  many  dollars  a  share  cheaper  than 
the  prices  ruling  at  the  moment.  Safety  of  capital  can 

160 


WHEN  TO  BUY  SECURITIES  161 

only  Be  assured  by  buying  stocks  when  they  are  cheap 
and  when  there  is  a  prospect  of  higher  prices  for  them. 
This  cannot  be  insisted  upon  too  strongly.  In  any  event, 
one  will  often  save  the  equivalent  of  more  than  a  year's 
dividends  by  patient  delay;  and  a  man  who  cannot  wait 
for  a  decline  has  no  business  to  put  his  money  into  stocks. 
If,  in  addition  to  safety,  one  wishes  to  add  an  actual  in- 
crement to  his  principal,  he  must  certainly  buy  when  the 
market  is  down  and  not  during  the  whirl  of  a  furious  bull 
market.  While  awaiting  his  opportunity,  an  investor 
might  amuse  himself  by  making  a  chart  of  the  fluctua- 
tions of  the  stock  he  has  particularly  in  view,  covering  a 
period  of  a  year  or  more  back. 

To  clear  away  one  misconception,  at  the  start,  allusion 
may  be  made  to  the  doctrine,  entertained  by  some,  that 
a  stock  is  to  be  bought  when  it  has  fallen  to,  or  below, 
its  average  price  for  the  last  five  years.  Such  a  rule  is 
well  enough,  but  it  would  give  an  investor  few  oppor- 
tunities. If  that  plan  had  been  followed  in  1905,  for  ex- 
ample, one  might  have  tried  to  buy  some  one  or  more  of 
the  excellent  stocks,  named  below,  at  the  prices  set  oppo- 
site: 

Am.  Car  &  Foundry,  pfd.  $  78      Lake  Shore $284 

Amer.  Locomotive,  pfd..  88      Louis.  &  Nash 108 

American  Sugar 127      Manhattan   131 

Atchison   67    *Mo.  Pacific 102 

Baltimore  &  Ohio 90      Nat  '1  Biscuit,  pfd 100 

Canadian    Pacific 114    *N.  Y.  Central 142 

Central,  of  N.  J 167  N.  Y.,  Ch.  &  St.  L.,  1st  pfd.  107 

Chic.,  Mil.  &  St.  Paul 157    "Pennsylvania 141 

C.  C.  C.  &  St.  L 83      Union  Pacific 97 

Delaware  &  Hudson 154      U.  S.  Steel,  pfd 79 

Illinois  Central 139      Western  Union 88 


162  HOW  MONEY  IS  MADE 

Only  three  of  the  stocks  named,  those  marked  with  an 
asterisk,  fell  as  low  in  1905  as  the  prices  given;  and  in- 
deed few  others  fell  in  that  period  to  their  five-year 
average.  Obviously,  this  method  of  judging  when  to  buy 
would  have  had  little  practical  value  in  1905. 

It  would  have  answered,  during  certain  periods  after 
the  Civil  War  and  in  the  '80s  and  '90s.  In  1903  and  1904, 
the  plan  would  have  been  good  enough,  because  there  had 
been  great  depression,  with  heavy  drives  at  prices;  but 
other  considerations  would  have  dictated  buying  then  and 
they  would  have  been  convincing  and  sufficient.  On  the 
whole,  it  is  so  seldom  that  the  five-year  average  can  be 
depended  on  as  a  guide  that  its  practical  value  is  almost 
nil. 

With  reference  to  bonds,  the  five-year  average  may 
apply;  but  even  in  that  case,  this  is  not  the  rule  to 
govern. 

In  other  lands,  where  conditions  may  be  stationary,  the 
five-year-average  plan  may  answer  in  any  given  year. 
Some  other  guide  must  be  sought  for  in  a  region  like  the 
United  States,  where  underlying  forces  are  lifting  the 
whole  body  of  good  stocks  to  higher  and  yet  higher  levels 
as  time  rolls  on  and  the  country  is  working  out  its  mani- 
fest destiny. 

There  is  one  contingency  in  which  the  doctrine  of 
average  price  may  be  acted  upon.  When  a  stock  has 
risen  rapidly  from  a  previously  low  level,  it  is  apt  to 
react  nearly  or  quite  half-way  before  resuming  the  up- 
ward swing.  The  phenomenon  is  seen  more  distinctly 
in  the  speculative  and  highly  manipulated  stocks.  A 
case  in  point  was  afforded  by  Tennessee  Coal  &  Iron, 
which  rose  from  around  $32  in  May,  1904,  to  $106  in 


WHEN  TO  BUY  SECURITIES  163 

April,  1905,  an  advance  of  about  $74  a  share.  A  month 
later,  the  price  had  reacted  on  profit-taking  to  $73,  a 
drop  of  $33  a  share  or  about  half  the  rise.  Reactions 
half-way  back  are  often  seen  in  the  foot-balls  of  specula- 
tion in  Wall  Street;  and  instances  of  the  tendency  are 
shown  in  the  chart  of  Southern  Pacific  on  another  page. 
An  investor  who  has  become  convinced  that  a  long  period 
of  prosperity  lies  ahead,  that  the  bull  market  will  run 
on  for  some  time,  and  that  a  stock  is  worth  the  price  it 
is  selling  at,  can  frequently  buy  his  favorite  to  advantage 
on  these  half-way-back  reactions,  if  he  has  missed  his 
opportunity  at  the  bottom. 

The  best  guides  for  buying  are  based  on  common  sense, 
a  knowledge  of  underlying  conditions,  and  a  clear  under- 
standing of  the  present  situation  of  the  market  with 
reference  to  the  last  crisis  or  period  of  depression. 

Assume,  first,  that  good  times  are  returning  after  a  long 
term  of  depression.  The  upward  movement  may  have 
just  begun.  Is  money  accumulating  in  the  banks?  Are 
rates  of  interest  less  than  4  per  cent?  Have  there  been 
failures,  a  great  decline  in  stocks,  smash  after  smash 
in  the  stock  market,  and  do  standard  stocks  sell  at  prices 
which  would  return  more  than  4  per  cent  on  the  money 
invested,  perhaps  5,  perhaps  6  per  cent?  Can  an  in- 
vestor gather  from  such  sources  of  information  as  are 
open  to  him  an  idea  that  liquidation  in  stocks  has  virtually 
ended?  In  a  year  of  this  character,  the  time  to  buy  is 
during  a  strong  drive  in  prices  in  the  months  from  July 
to  October.  In  every  year  of  depression  since  1860,  bot- 
tom has  been  reached  some  time  between  July  and  Octo- 
ber. In  those  years,  stocks  may  have  seemed  amazingly 
cheap,  all  things  considered,  in  the  Spring,  but  experience 


164  HOW  MONEY  IS  MADE 

shows  that  they  have  always  been  cheaper  yet  in  the  Fall. 
No  iron-clad  rule  can  be  laid  down,  as  to  whether  it  is 
preferable  to  buy  in  July  or  the  Fall  in  these  years  of 
prostration.  No  investor  can  dispense  with  the  exercise 
of  judgment  in  every  action  on  the  subject  of  stocks. 
But  if  he  keeps  his  eyes  on  the  banking  situation,  he 
cannot  go  far  astray  in  deciding  whether  to  buy  in  July 
or  at  some  later  date.  It  may  be  said,  however,  that  pur- 
chases as  early  as  July  in  a  year  of  desperate  depression, 
after  one  or  two  years  of  the  downward  swing,  are  gen- 
erally safe  enough  for  all  practical  purposes.  An  investor 
is  then  merely  taking  back  good  stocks,  previously  sold  at 
much  higher  prices ;  and  if  they  go  somewhat  lower  in  the 
Fall,  no  harm  can  come  to  him,  provided  that  the  trend 
of  the  times  is  toward  betterment. 

But  suppose  that  an  investor  did  not  recover  his  stocks 
at  or  near  the  bottom  of  prices  in  a  year  of  great  de- 
pression! Suppose  that  the  Hull  movement  has  made 
some  progress  upward,  when  he  comes  into  the  money 
which  he  wants  to  invest,  and  that  prices  are  higher  than 
they  were!  What  then?  If  conditions  remain  good,  if 
money  is  easy,  the  banks  have  ample  resources,  times 
continue  to  brighten,  and  prosperity  looms  large  for 
months  or  years  ahead,  then  the  best  time  to  buy  is  at  the 
bottom  of  the  normal  yearly  swings  in  prices.  June  or 
July,  after  a  considerable  drop  in  prices,  or  later  in  Sep- 
tember or  October,  is  the  time  to  buy. 

In  a  general  way,  a  good  rule  in  years  of  reaction  is 
to  buy  when  things  look  absolutely  the  worst,  when  men 
who  hang  all  day  over  a  stock  ticker  feel  sure  that  some 
catastrophe  is  impending  they  know  not  what,  and  that 
prices  are  going  lower  yet.  The  inexperienced  part  of 


.WHEN  TO  BUY  SECURITIES  165 

the  public  always  sells  at  such  a  time  as  that;  and  an 
investor  can  get  any  stock  he  wants  without  bidding  up 
the  price  to  do  so.  A  man  must  have  some  confidence  in 
the  future  of  his  country  and  its  inexhaustible  spirit  of 
enterprise  and  its  resources. 

A  panic  in  an  improving  year  always  brings  a  bargain 
day,  sooner  or  later.  If  one  is  not  quick  enough  to  buy 
on  the  day  of  the  great  smash,  he  can  commonly  do 
so  to  advantage  a  few  days  later,  because,  while  there 
is  invariably  an  excited  rally  immediately  after  a  panic, 
a  second  decline  nearly  if  not  quite  to  the  low  level 
reached  before  has  always  heretofore  taken  place.  On  a 
great  Hreak,  stocks  are  always  bought  in  quantity  by 
prominent  financial  interests  to  support  the  market  and 
prevent  it  from  going  to  pieces  entirely ;  and  when  order 
has  been  measurably  restored,  these  stocks  are  sold,  and 
during  the  selling  there  is  another  recession. 

During  a  great  boom  in  business  and  stocks,  millions 
of  money  are  dispersed  for  dividends  and  interest,  every 
month.  It  frequently  happens  that  an  investor  has  idle 
funds  at  such  a  time.  What  shall  he  do?  He  is  exactly 
the  man,  for  whom,  in  the  parlance  of  the  Street,  the 
pools  and  operators  are  " gunning."  The  air  will  be 
found  full  of  reasons  why  he  should  not  delay  but  invest  at 
once.  Those  who  have  stocks  to  sell  want  his  money 
and  they  will  put  forth  every  effort  to  induce  him  to 
buy  at  high  prices.  This  is  the  most  dangerous  and  diffi- 
cult time  for  an  investor.  He  must  ask  himself:  Are 
stocks  selling  above  investment  worth?  Has  the  boom 
been  in  progress  several  years?  Have  money  supplies 
been  diminished  by  the  activity  of  business  and  by  stock 
market  operations,  until  loans  are  more  than  deposits, 


166  HOW  MONEY  IS  MADE 

or  until  surplus  deposits  are  nearly  at  zero  ?  Are  interest 
rates  high?  What  is  the  state  of  foreign  trade?  Does 
disturbing  legislation  threaten?  Have  there  been  ex- 
posures of  fraud  or  wrong-doing?  On  a  calm  and  dis- 
passionate review  of  these,  and  all  other,  elements  of  the 
financial  situation,  are  there  present  a  majority  of  the 
circumstances  which  always  forerun  a  crisis  and  a  reac- 
tion in  trade?  To  all  appearances,  the  sky  may  be  clear, 
no  clouds  or  distant  mutterings  may  indicate  an  ap- 
proaching storm,  every  favorable  factor  may  be  treated 
lightly  by  the  press  (which,  from  principle,  not  at  all  from 
mercenary  considerations,  prefers  never  to  alarm  the  in- 
vesting public),  unbounded  enthusiasm  may  prevail 
among  acquaintances,  and  rumors  may  abound  of  yet 
higher  prices  for  stocks.  This  is  precisely  the  time  not 
to  buy.  In  a  few  instances,  stocks  may  rise  high'er.  An 
investor  may  feel,  for  the  moment,  that  he  has  lost  an 
opportunity  in  some  of  them.  He  will  do  well,  however, 
to  wait  with  a  perfectly  calm  mind  for  the  rising  tide  to 
halt  and  then  to  ebb  furiously  in  the  manner  character- 
istic of  periods  of  crisis  and  reaction.  He  will  buy  only 
when  the  reaction  has  run  its  course,  as  nearly  as  can  be 
judged. 

It  is  seldom  worth  while  to  buy  an  active  stock  imme- 
diately after  a  dividend  has  been  increased.  The  tempta- 
tion to  go  in  at  once  is  almost  irresistible,  especially  if  the 
stock  at  once  starts  upward.  One  may  rely  upon  it,  that 
the  insiders  and  their  friends  have  had  advance  informa- 
tion of  the  good  thing  coming  and  have  been  buying  the 
stock  when  it  was  low,  in  order  to  sell  out  later.  Good 
news,  such  as  this,  is  certain  to  be  followed  by  at  least 
a  moderate  reaction.  That  is  the  time  to  buy. 


WHEN  TO  BUY  SECURITIES  167 

Those  who  have  ample  funds,  a  portion  of  which  they 
are  willing  to  risk  in  the  purchase  of  non-dividend-paying 
stocks,  often  devote  some  attention  to  bankrupt  companies, 
which  are  about  to  be  organized.  A  great  deal  of  money 
has  been  made  in  such  stocks.  One  needs  only  to  com- 
pare the  present  value  of  Northern  Pacific,  Reading,  Erie, 
Union  Pacific  and  other  stocks  of  that  class,  to  realize 
the  profits  which  have  been  made  by  courageous  buyers, 
who  accumulated  some  of  those  securities  when  they  could 
be  had  for  a  song.  No  doubt,  years  of  waiting  followed, 
but  sterling  companies  were  sure  to  shake  themselves 
free  from  their  difficulties  in  time.  In  the  rearrangement 
of  the  finances  of  a  bankrupt  company,  it  is  not  uncom- 
mon to  levy  an  assessment  of  $1  to  $5  a  share,  or  more, 
on  the  stock.  An  investor  will  wait  until  the  plan  of  reor- 
ganization is  published.  He  will  then  know  exactly  what 
he  has  to  face.  Many  holders  will  sell  rather  than  pay 
the  assessment;  and  it  seldom  fails  to  come  to  pass,  that 
a  buyer  can  secure  the  stock  at  as  low  a  price  as  before 
and  sometimes  lower.  There  will  be  little  harm  in  wait- 
ing until  he  can  buy  stock,  on  which  all  the  assessments 
have  been  paid. 

To  summarize  the  whole  matter,  and  to  codify  the  rules 
for  buying  as  far  as  practicable  : 


1. — In  years  of  trade  depression  and  reactions  in  stocks,  buy 
only  in  the  late  Summer  or  Fall,  on  some  strong  drive  at  prices, 
and  when  a  stock  has  fallen  to,  or  below,  actual  investment  worth. 

2. — In  years  of  good  business,  if  the  market  has  not  risen  for 
more  than  one  year,  buy  on  strong  reactions  in  the  Summer  or 
Fall  months,  and  especially  if  the  market  has  been  extremely  dull 
for  several  days  or  weeks. 


168  HOW  MONEY  IS  MADE 

3. — In  a  good  year,  buy  during  a  panic  or  the  second  drop  of 
prices,  after  recovery  has  begun. 

4. — After  a  dividend  has  been  raised,  buy  after  the  next  strong 
reaction. 

5. — After  a  stock  has  long  been  inactive  and  when  the  price  is 
low,  buy  when  transactions  become  large  and  the  price  begins  to 
rise. 

6. — Do  not  buy  after  a  long  or  sudden  rise,  especially  if  the 
price  has  risen  above  investment  value. 

7.— If  a  stock  is  not  above  investment  value,  buy,  after  a  sud- 
den rise,  when  the  stock  has  reacted  half-way  back. 

8. — Do  not  buy  a  stock,  whose  earnings  have  been  barely  able 
to  meet  fixed  charges  and  dividends,  if  an  intention  is  made 
manifest  to  expand  the  capital  or  bonded  debt  considerably. 

9. — Buy  the  stock  of  a  company  about  to  be  reorganized  only 
after  the  plan  of  reorganization  has  been  made  known. 


XIII 

WHEN  TO  SELL  SECURITIES. 

TOP  OF  THE  MARKET  NOT  SO  DEFINITE  AS  THE  BOTTOM.— BOOMS  AND 
THEIR  ENDING.  — STOP  ORDERS. — A  FEW  NOTEWORTHY  INSTANCES 

IN  Wall  Street,  among  the  men  who  trade  actively  in 
stocks,  in  order  to  catch  the  twists  and  turns  in  prices, 
from  week  to  week,  it  is  not  uncommon  to  find  individuals, 
who  have  a  genius  for  buying  at  the  exact  psychological 
moment,  but  who  tend  to  overstay  and  frequently  let  the 
profits  of  to-day  run  into  losses  to-morrow.  There  are 
others,  whose  insight  as  to  the  proper  time  to  sell  is 
marvelous,  but  who  lack  the  faculty  of  buying  at  the 
right  juncture.  It  is  possible  to  train  the  mind  so  as  to 
act  with  reasonable  discretion  in  both  cases. 

With  reference  to  selling,  a  general  rule,  which  has 
stood  the  test  of  time,  is  to  let  go  of  stocks,  when  they  are 
above  investment  worth,  when  there  is  excited  buying  by 
the  general' public  or  by  traders  who  are  short  of  stocks, 
when  the  volume  of  transactions  is  unusually  large,  and 
when  those  periods  coincide  approximately  with  the 
logical  culmination  of  a  normal  yearly  movement  in 
prices,  especially  if  the  rise  has  been  in  progress  for 
several  years.  The  rule  seems  simplicity  itself.  In  prac- 
tice, it  is  difficult  to  follow,  owing,  to  speak  plainly,  to 
the  credulity  and  cupidity  of  human  nature. 

It  is  presumed  that  an  investor  has  bought  good  stocks 

169 


170  HOW  MONEY  IS  MADE 

during  a  period  of  depression  or  reaction,  and  that,  by 
patient  waiting  through  good  and  evil  days,  he  has  seen 
$15,  $25,  or  more,  added  to  the  value  of  each  share  he 
holds,  and  that  he  has  meanwhile  received  one  or  more 
dividends  on  the  stocks.  Trading  at  the  stock  exchange 
may  be  fast  and  furious.  Enthusiasm  prevails  on  every 
side.  Sales  have  run  up  to  an  aggregate  of  one  or  two 
million  shares  a  day.  The  time  may  be  at  hand  for  the 
top  of  a  normal  yearly  swing  in  stocks.  At  this  juncture, 
an  investor  will  free  his  mind  entirety  from  the  tips  and 
rumors  of  Wall  Street  and  consider,  in  the  most  matter- 
of-fact  way,  how  much  higher,  if  any,  the  market  is  likely 
to  go. 

It  is  important  to  watch  for  the  phenomena  of  the  top 
of  a  bull  movement,  elsewhere  referred  to.  In  its  origin, 
a  bull  market  is  as  much  the  product  of  natural  forces, 
as  are  the  plants,  the  leaves  and  flowers,  which  cover  the 
face  of  nature  in  the  Spring;  and  the  growth  of  prices 
resembles  the  slow  progress  of  the  crops,  in  that  the 
movement  is  exposed  to  accidents  and  must  be  carefully 
aided  by  the  art  of  man.  But  there  is  a  vast  difference 
in  the  circumstances  which  attend  the  harvest.  On  the 
farms  and  plantations,  the  husbandman  can  sedately 
pluck  the  fruits,  reap  the  ripened  grain,  and  harvest  the 
sugar  cane  and  cotton,  with  full  knowledge  that  the  time 
has  come  and  that  delay  will  ensure  the  blighting  of  all 
his  hopes  by  the  inevitable  and  bitter  frosts  of  Winter. 
The  signs  that  the  harvest  time  has  come  are  not  so 
obvious  at  the  end  of  a  bull  movement  in  stocks.  They 
never  are  as  clear  at  the  top  as  at  the  bottom  of  the 
market. 

An  investor  must  always  be  attentive,  but  need  not  be 


WHEN  TO  SELL  SECURITIES  171 

in  undue  haste.  He  must  consider,  first  of  all,  whether 
the  swing  upward  is  likely  to  last  for  years,  as  it  did  after 
1861,  1865,  1877,  1884,  and  1896.  He  must  decide  how 
much  is  left  of  the  usual  four-  or  five-year  swing  upward. 
He  must  also  determine  whether  he  will  wait  for  the  end 
of  the  long  swing  or  take  advantage  of  the  normal  yearly 
turn.  It  is  probably  safer  to  pursue  the  latter  course, 
because  an  investor  will  then  remain  a  closer  student 
of  conditions ;  and  he  will  be  safer  against  accidents,  war 
scares,  crop  shortages,  the  death  of  prominent  magnates 
in  the  financial  world,  and  unexpected  exposures  of  ras- 
cality or  failures  of  institutions. 

As  elsewhere  narrated,  at  the  top  of  a  bull  movement, 
the  great  operators  and  pools  must  create  a  public  fol- 
lowing to  which  to  sell  their  stocks  at  good  prices.  The 
manner  in  which  they  do  this  has  already  been  told.  The 
point  is,  that,  when  the  market  is  being  made  to  look  the 
strongest,  forces  may  be  mustering  which  are  certain  to 
bring  about  a  reaction  or  a  long  decline. 

A  cool-headed  investor  will  reason  over  the  matter  with 
entire  sang  froid.  Suppose  that  Union  Pacific  had  been 
bought  in  1904  around  $75.  In  November  of  the  same 
year,  the  stock  had  risen  to  $117,  near  the  highest  price  on 
record.  An  advance  of  $42  a  share  must  have  proved, 
and  to  many  did  prove,  a  strong  temptation  to  sell.  But 
the  company  had  paid  4  per  cent  for  years ;  and  its  earn- 
ings had  grown  finally  to  around  10  per  cent  in  excess 
of  fixed  charges,  as  appeared  from  its  financial  reports. 
It  was  as  certain  as  anything  could  humanly  be,  that  the 
moderate  rate  of  4  per  cent  would  in  time  give  place  to 
a  larger  annual  distribution  on  the  stock.  The  times  were 
improving.  No  signs  of  trouble  were  visible  in  the  finan- 


172  HOW  MONEY  IS  MADE 

cial  outlook.  Surplus  deposits  were  large  and  money  in 
ample  supply.  The  usual  January  or  Spring  rise  was 
just  ahead;  and  it  could  have  safely  been  taken  for 
granted  that  nothing  would  be  lost  by  waiting  until  that 
time.  In  February,  1905,  there  was  a  week  of  excited 
trading  at  the  New  York  Stock  Exchange,  with  total  sales 
of  almost  2,000,000  shares  a  day.  During  that  swirl  up- 
ward, Union  Pacific  was  rushed  to  $138  a  share.  At  that 
price  an  investor  would  get  less  than  3  per  cent  on  his 
investment.  That  was  the  time  to  sell.  A  few  months 
later  one  could  have  repurchased  $20  a  share  lower.  On 
the  increase  of  the  dividend  to  10  per  cent  Union  Pacific 
has  since  risen  above  $180. 

Take  another  instance!  Suppose  that  an  investor  had 
bought  United  States  Steel,  preferred,  early  in  1904, 
around  $55,  having  become  convinced  that  the  Corpora- 
tion was  able,  and  resolved,  to  maintain  the  7  per  cent 
dividend.  By  October  the  stock  had  risen  nearly  to  $85 
A  quarterly  report  is  issued  by  the  Steel  officials,  and 
from  this,  it  could  have  been  learned  that  profits  were 
steadily  expanding  and  that  the  trade  had  entered  upon 
a  period  of  genuine  prosperity.  The  facts  would  have 
justified  the  belief  that  Steel,  preferred,  would  ultimately 
rise  to  par  or  higher.  A  sound  industrial,  tried  by  the 
storms  of  depression  and  reaction  and  paying  7  per  cent 
regularly,  should  be  worth  from  $100  to  $120  and  upward. 
Until  the  security  in  question  should  have  approached  the 
higher  figure,  then,  no  important  reason  would  have 
appeared  for  selling.  Had  an  investor  sold  during  the 
excited  market  of  February,  1905,  he  could  have  realized 
around  $96  for  his  stock  and  would  have  added  the  hand- 
some sum  of  over  $40  a  share  to  his  principal.  He  might 


WHEN  TO  SELL  SECURITIES  173 

have  bought  again,  next  month,  a  few  dollars  a  share 
cheaper;  but  the  prospect  of  this  was  small;  and  the  in- 
vestor might  have  safely  waited  for  the  quotation  which 
the  stock  seemed  destined  to  reach  at  a  not  distant  date. 
At  the  top  of  the  Spring  rise  in  1905  it  went  nearly  to 
$105.  This  figure  coincided  with  the  culmination  of  a 
normal  yearly  swing;  and  that  was  the  time  to  sell. 
Steel,  preferred,  reacted  nearly  to  $90  during  the  dull 
Summer  months  of  1905  and  has  since  been  sold  at  $113. 

A  typical  instance  of  the  proper  time  to  sell  was  sup- 
plied by  St.  Paul  in  1902.  Purchases  could  have  been 
made  around  $150  several  times  in  the  first  three  months 
of  1901 ;  and  on  one  occasion  it  sold  as  high  as  $186.  As 
a  6  per  cent  investment  stock,  at  $186,  St.  Paul  would 
have  yielded  about  3*/2  per  cent  on  the  purchase  price. 
Scores  of  investors  sold  their  holdings  then  and  repur- 
chased, the  same  year,  $30  a  share  lower.  By  September, 
1902,  St.  Paul  had  been  bulled  to  $198^.  It  had  been 
"tipped"  for  $200  and  came  near  enough  to  that  figure 
for  all  practical  purposes.  The  market  then  hesitated. 
The  stock  was  about  to  be  placed  on  a  7  per  cent  basis; 
but  around  $200,  even  then,  the  stock  would  have  paid 
only  3*/2  per  cent  on  the  purchase  price.  At  the  critical 
moment,  in  order  to  support  the  stock  and  enable  the  pool 
to  market  its  later  purchases  without  a  loss,  the  Street 
was  filled  with  rumors  that  St.  Paul  was  going  to  $220. 
A  few  rash  speculators  may  have  bought  at  the  prices 
then  ruling;  but  at  $220  St.  Paul  would  have  paid  less 
than  3^4  per  cent.  Money  was  worth  more  than  that 
then.  Surplus  deposits  of  the  New  York  banks  were  al- 
most exhausted.  Interest  rates  were  high.  Every  under- 
lying condition  pointed  to  a  coming  crisis  and  reaction. 


174  HOW  MONEY  IS  MADE 

Credit  was  badly  strained.  Buyers  at  Spring  prices  had 
more  than  $30  a  share  profit  and  this  would  have  paid 
the  7  per  cent  dividend  for  four  years.  Conservative  in- 
vestors sold  without  more  ado.  St.  Paul  never  went  even 
to  $200,  much  less  $220 ;  and  it  entered  upon  a  downward 
swing  and  its  fall  was  never  seriously  interrupted  until 
September,  1903,  when  it  sold  around  $134  a  share.  Those 
who  did  not  act  promptly  and  get  out  in  September,  1902, 
had  an  opportunity  to  do  so  around  $180  to  $183  in  the 
January  rise  of  1903. 

It  is  always  harder  to  decide  when  to  sell  than  when  to 
buy.  At  the  height  of  a  bull  movement  current  gossip 
tends  to  blunt  the  perceptions  as  to  the  foundations  on 
which  the  market  rests.  The  hysterics  which  prevail  at 
the  bottom  of  a  bear  market,  or  in  a  hotel  fire,  or  when 
the  steamer  is  in  trouble  at  sea,  are  as  hard  to  contend 
with  as  the  contagious  enthusiasm  which  rules  when  a 
bull  market  is  fast  and  furious.  Hotel  lobbies  and  the 
newspapers  are  full  of  tales,  most  of  them  grossly  ex- 
aggerated, in  which  all  sorts  of  people,  including  actresses, 
head  waiters,  valets  and  clerks,  are  reported  to  have  made 
fortunes  in  the  stock  market  and  to  have  gone  in  again 
on  various  stocks  named.  Cynicism  is  the  best  ally  at  such 
times.  A  careful  man  will  disentangle  himself  bluntly 
from  all  outside  influences;  and  if  any  of  the  stocks 
which  he  holds  are  in  truth  going  higher,  he  will  "let 
the  other  fellow"  make  the  money  and  will  sell  him  the 
stocks  to  do  it  with.  He  should  then  leave  the  market, 
stay  out  entirely,  and  wait  for  the  normal  downward 
swing  which  is  sure  to  follow.  He  can  afford  to  devote 
himself  to  private  affairs  for  a  few  months  before  com- 
mitting himself  again. 


WHEN  TO  SELL  SECURITIES  175 

A  practice  which  will  be  found  useful  to  many  who 
cannot,  or  do  not  intend  to,  pay  close  attention  to  market 
vagaries,  or  who  expect  to  be  absent,  is  the  employment 
of  so-called  "stop-loss  orders"— stop  orders,  for  short. 
These  are  a  protection  against  sudden  panics  and  unex- 
pected reactions. 

The  theory  of  stop  orders  is  based  on  a  number  of  con- 
siderations, among  them  being  the  tendency,  already  re- 
ferred to,  of  stocks  to  react  half-way  back  after  a  strong 
rise  or  fall.  No  greater  decline  than  half-way  is  likely 
ever  to  take  place,  unless  a  bull  movement  has  definitely 
ended ;  and  conversely,  no  greater  rally  than  that  may  be 
expected,  unless  the  market  has  finally  turned  upward 
for  good. 

An  investor  who  makes  use  of  a  stop  order  would  wait 
until  there  had  been  a  good  rise,  say  $15  a  share.  To 
take  a  concrete  instance,  say  from  $80  to  $95.  He  would 
then  order  his  broker  to  "sell  the  stock  at  $88  stop." 
That  is  half-way  back.  As  the  rise  goes  on,  he  will  raise 
the  stop  order,  placing  the  point  for  a  sale  half-way  back 
from  highest  quotations.  All  this  will  not  prevent  him 
from  selling  at  any  time,  and  any  price,  he  chooses;  but 
it  will  ensure  at  least  a  part  of  his  profits  in  case  of  a 
sudden  panic  like  that  of  May,  1901,  or  any  other  severe 
reaction  while  he  is  away  or  inattentive. 

A  useful  fact  to  bear  in  mind  is  this,  that,  in  bull  mar- 
kets, the  highest  prices  of  any  given  year  are  made  either 
in  January  or  April,  on  the  one  hand,  or  in  the  Fall.  In 
a  bear  market,  and  during  a  trade  reaction,  they  are  made 
in  January  or  February. 

To  summarize,  a  few  rules  will  serve  as  an  approximate 
guide  as  to  the  time  to  sell. 


176  HOW  MONEY  IS  MADE 

1. — In  any  event,  eell,  when  every  underlying  condition  of 
finance  points  to  an  approaching  crisis  and  depression. 

2. — Sell,  when  the  price  is  above  investment  value,  on  any 
sudden  rise,  or  at  the  top  approximately  of  a  normal  yearly 
swing. 

3. — Sell,  in  January  or  February,  when  surplus  deposits  have 
fallen  near  to  or  below  zero,  when  interest  rates  are  high,  and 
when  the  slackening  of  trade  can  no  longer  be  disguised. 

4. — Sell,  as  a  normal  yearly  movement  in  prices  reaches  its  usual 
period  of  culmination,  if  you  expect  to  repurchase  after  a  fair 
reaction. 

5. — Never  sell  a  stock  which  has  been  carried  through  a  long 
and  sustained  decline,  when  it  is  at  absurdly  low  figures. 

6. — Never  sell  on  news  of  a  strike  among  the  workmen  of  the 
corporation,  unless  the  stock  is  above  investment  worth,  and  then 
you  should  sell  anyhow. 

7.— Never  sell  during  a  panic,  in  a  bull  market,  except  on  a 
stop  order,  but  hold  on  until  the  rally,  and  then  judge  dispas- 
sionately. 

8. — Never  sell  a  good  stock  on  mere  market  rumors.  They 
are  too  often  set  afloat  to  mislead. 

9. — Finally,  do  not  be  discontented  if  your  stock  does  not  bring 
the  very  highest  price  which  has  been  paid  for  it.  The  highest 
prices  seldom  last  for  more  than  a  few  minutes  and  cannot  be 
realized  by  a  person  away  from  Wall  Street  and  by  few  in  it. 


MAXIMS  OP  WALL  STREET  181 

Prices  do  not  respond  to  conditions,  they  respond  only 
to  manipulation.— The  motto  of  cynics. 

What  goes  up  must  come  down. 

If  you  have  planned  for  large  profits,  never  take  small 
ones. 

"  Ample  and  accurate  information  is  the  first  step  to- 
ward success."— J.  J.  Hill. 

When  Rothschild  was  asked  the  secret  of  his  wealth,  he 
replied  that  it  was  by  never  selling  stocks  at  the  top  and 
never  buying  at  the  bottom.  In  other  words,  he  never 
waited  for  the  extremes  of  the  market. 


XV 

FINANCIAL  TEEMS  AND  PHEASES 

A  FEW  OP  THE  TECHNICAL  TERMS  IN  USE  IN     FINANCIAL  CIRCLES 
DEFINED  FOR  THE  BENEFIT  OF  THE  GENERAL  READER 

Account.— More  in  use  in  London  than  here,  in  England 
stocks  are  seldom  paid  for  at  once,  but  are  settled  for  fort- 
nightly. Two  days  are  set  apart,  twice  a  month,  for  the 
settlement  of  contracts  in  stocks.  To  "buy  for  account " 
means  that  they  are  to  be  paid  for  at  the  next  fortnightly 
settlement. 

Adjustment  Bonds.— Bonds  issued  for  the  adjustment  of 
the  finances  of  a  company.  They  are  a  lien  on  any  new 
property,  not  covered  by  previous  bond  issues,  and,  with 
reference  to  other  property,  they  take  their  place  after 
already  existing  liens. 

Arbitrage.— The  buying  of  stocks  in  one  market,  where 
they  are  low,  and  the  sale  of  them  in  another,  where  they 
are  higher.  Or  the  reverse.  The  profit  is  usually  small 
and  results  from  quick  turns  in  the  stocks.  A  class  of 
arbitrageurs  on  the  New  York  stock  exchange  devote 
themselves  to  arbitrage  transactions  between  that  city 
and  London. 

Averaging.— To  buy  every  half  point  or  so  down,  in  a 

182 


FINANCIAL  TERMS  AND  PHRASES          183 

falling  market,  or  to  sell  short  on  a  similar  scale  up,  in 
a  rising  market.  The  object  is  to  make  total  transactions 
average  a  satisfactory  and  safe  figure. 

Bear.— A  bear  on  stocks  is  a  man  who  believes  that  the 
market  will  go  down,  who  therefore  sells  short  in  order 
to  buy  back  at  a  profit,  and  whose  operations,  if  he  is  a 
manipulator,  tend  to  aid  the  fall  in  prices. 

Bill  of  Exchange.— A  draft,  or  written  order,  for  the 
payment  of  money,  issued  usually  against  a  shipment  of 
goods,  the  draft  to  be  paid  at  the  point  to  which  the  ship- 
ment is  made.  The  term,  bill  of  exchange,  is  used  in 
international  transactions,  but  it  means  no  more  than 
draft.  It  is  drawn  by  one  person  upon  another  and  is 
to  be  paid  to  a  third  party  or  bank. 

Bourse.— The  name  given  in  Europe  to  a  stock  exchange. 

Broker.— A  man  who  executes  an  order  for  the  purchase 
or  sale  of  securities,  in  behalf  of  a  customer,  charging  a 
small  commission  for  his  services. 

Bucket  Shop.— The  name  given  to  an  office,  which  is 
ostensibly  a  regular  brokerage  concern,  but  which  as  a 
rule  has  no  connection  with  or  membership  in  any  ex- 
change. The  concern  accepts  orders  for  the  sale  or  pur- 
chase of  stocks,  but  often  records  the  order  without  exe- 
cuting it,  or,  if  the  order  is  executed,  then  the  bucket 
shop  sells  as  much  stock  as  the  customer  buys,  or  buys 
as  much  as  he  sells,  thus  never  carrying  stocks.  If  the 
customer  wins,  the  bucket  shop  loses.  Conversely,  if  the 


184  HOW  MONEY  IS  MADE 

customer  loses,  the  bucket  shop  wins.  Practically,  the 
bucket  shop  bets  against  its  customers  as  to  the  course 
of  the  market.  It  is  asserted  that  when  the  bucket  shops 
of  the  country  are  loaded  with  orders  for  long  stock  for 
their  customers,  they  engineer  a  raid  upon  the  market, 
with  a  view  to  wiping  out  their  customers'  accounts  and 
pocketing  the  money. 

Bull,— A  man  who  believes  that  the  market  is  going  up, 
who  buys  and  carries  stocks  for  a  rise,  and  who  labors  to 
bring  about  higher  prices. 

Call.— A  contract  which  pledges  the  man  who  sells  the 
"call"  to  deliver  a  certain  stock,  at  a  certain  time,  at  a 
price  named.  The  seller  receives  a  sum  of  money,  say 
$100,  for  the  "call."  Practically,  the  transaction  is  a 
bet  between  the  parties  as  to  the  future  course  of  the 
stock. 

Call  Loans.— Money  loaned  out  on  collateral  security, 
with  the  understanding  that  the  loan  is  to  be  repaid  at 
any  time  on  demand,  that  is  to  say,  on  call. 

Cats  and  Dogs.— A  Wall  Street  term,  applied  to  obscure, 
non-dividend  paying  or  worthless  stocks.  When  the  "cats 
and  dogs"  are  suddenly  boomed  in  price,  the  bull  party 
is  supposed  to  be  for  the  moment  at  the  end  of  its  re- 
sources for  continuing  the  upward  movement. 

Clearing  House.— A  building  to  which  all  the  banks  of 
a  large  city,  connected  with  the  Clearing  House  Associa- 
tion, send  all  the  checks  against  other  banks,  received 


FINANCIAL  TERMS  AND  PHRASES          185 

in  the  course  of  the  previous  day's  business.  Each  bank 
presents  to  the  representatives  of  other  banks  the  checks 
it  has  against  them.  If  a  bank  has,  on  the  total  of  these 
mutual  exchanges,  a  credit  balance,  it  receives  from  the 
Clearing  House  the  amount  in  cash.  If  it  has  a  debit 
balance,  it  must  send  the  amount  in  cash  promptly  to  the 
Clearing  House.  The  credit  and  debit  balances  are  exactly 
equal;  and  all  the  money  received  from  one  set  of  banks 
is  at  once  paid  out  to  the  others.  There  is  also  a  clearing 
house,  connected  with  the  stock  exchange,  in  which  stocks 
are  "cleared"  in  the  same  way  as  the  checks  in  the 
clearing  house  of  the  bank& 

Clearing  House  Loan  Certificates.— These  are  certificates 
for  money,  issued  in  times  of  monetary  stringency,  by  the 
Clearing  House,  upon  deposits  of  securities  as  collateral. 
They  are  received  by  all  the  banks  in  the  association,  in 
lieu  of  cash,  in  the  settlement  of  balances  against  each 
other,  and  they  enable  the  banks  to  go  through  a  financial 
crisis  without  suspending  payment. 

Commission.— A  broker's  charge  for  the  sale  or  purchase 
of  securities.  It  amounts  to  J^th  of  one  per  cent  for  each 
transaction,  or  $12.50  for  each  100  shares  of  stock. 

Contango.— A  term  used  in  London,  meaning  the  charge 
paid  by  the  buyer  of  stocks  for  continuing  his  contracts 
until  the  next  fortnightly  settlement. 

Comer.— A  situation,  when  all  the  floating  supply  of  a 
stock  has  been  purchased  by  a  pool  or  by  operators,  who 
can  then  dictate  the  price  at  which  sales  shall  be  made. 


186  HOW  MONEY  IS  MADE 

It  is  a  fearful  weapon  against  those  who  have  sold  a  stock 
short.  A  great  many  successful  corners  have  been  en- 
gineered in  Wall  Street  and  many  others  have  been  at- 
tempted but  failed. 

Covering. —The  buying  back  of  stocks,  which  have  been 
sold  short. 

Domestic  Exchange. —Drafts  for  money  issued  in  one 
city  and  payable  in  another.  The  discount,  or  premium, 
at  the  banks  on  domestic  exchange  shows  which  way  the 
tide  of  money  is  tending  between  the  two  cities.  If  a 
bank  in  Chicago  has  too  much  money  on  deposit  in  New 
York  and  can  use  its  funds  more  profitably  at  home,  it 
buys  drafts  on  New  York  only  at  a  discount,  and  sells 
drafts  on  New  York  either  without  charging  a  premium 
or  at  a  discount. 

Finance  Bills,— Foreign  exchange  is  sometimes  sold  by 
the  international  bankers,  not  against  a  credit  for  goods, 
produce,  or  securities  sold  abroad,  but  against  money  bor- 
rowed abroad.  In  that  case,  the  drafts  are  called  finance 
bills. 

Plat.— Without  interest.  When  stocks  are  loaned  flat,  it 
signifies  that  the  short  interest  in  stocks  is  large. 

Foreign  Exchange.— Drafts  for  money,  issued  by  bankers 
in  the  United  States  against  bankers  abroad.  When 
goods,  produce  or  securities  are  bought  in  the  United 
States  by  foreign  purchasers,  the  sellers  here  go  to  an 
international  bank  and  deposit  their  own  drafts  against 


FINANCIAL  TERMS  AND  PHRASES          187 

the  purchasers,  with  bills  of  lading,  etc.,  and  receive  the 
[banker's  own  drafts  against  his  correspondent  abroad. 
Cotton  is  the  quickest  maker  of  foreign  exchange. 
Whether  exchange  is  high  or  low  is  of  great  importance 
to  Wall  Street.  When  it  is  high,  the  tendency  is  toward 
exports  of  gold,  that  is  to  say  we  have  been  buying  abroad 
more  than  we  have  sold  and  the  excess  must  be  paid  for 
in  gold.  Conversely,  when  exchange  is  low,  the  tendency 
is  toward  imports  of  gold.  Par  of  exchange  is  4.8665. 
No  exact  figure  can  be  named  for  the  gold  export  and  im- 
port points  of  exchange,  because  the  figures  vary  from 
day  to  day;  but  normally,  when  exchange  sells  around 
4.89  or  higher,  gold  exports  are  indicated;  and  when  it 
sells  around  4.842  or  lower,  gold  imports  are  probable. 

Fractional  Lot. — Stocks  are  sold,  normally,  in  blocks  of 
100  shares  or  their  multiple.  A  fractional  lot  is  less 
than  100  shares,  and  usually  costs,  to  buy,  a  trifle  more 
per  share  than  in  the  case  of  100  shares,  say  %  of  a  point. 

Giving  Up, — Frequently  a  situation  arises  in  which  a 
broker  does  not  wish  to  appear  personally  as  a  buyer  or 
seller  of  a  certain  stock,  or  a  customer  wishes  to  operate 
through  another  than  his  regular  broker.  A  different 
broker  is  employed  to  execute  the  order,  who  then  "  gives 
up '  '  the  name  of  the  broker  for  whom  the  order  has  been 
executed,  and  that  ends  the  transaction. 

Granger  Roads. — The  northwestern  lines,  whose  earnings 
are  in  a  large  measure  due  to-  the  transportation  of  grain. 
The  leading  grangers  are  the  Atchison,  St.  Paul,  Rock 
Island,  Alton,  Northwestern  and  Union  Pacific  roads. 


188  HOW  MONEY  IS  MADE 

Holding  the  Bag.— Taking  all  the  stock  offered  without 
bidding  for  it.  It  signifies  either  quiet  accumulation  or 
an  unwilling  taking  of  stock  by  a  pool  or  the  bankers, 
who  give  this  support  to  a  stock  or  the  general  market  in 
tftnes  of  reaction. 

Kaffirs.— A  name  used  in  London  for  South  African 
mining  shares. 

Lamb.— The  novice  in  stocks,  the  credulous  and  inex- 
perienced, upon  whom  the  unscrupulous  prey. 

Legal  Reserve.— The  law  requires  national  banks  in  New 
York  and  15  other  central  reserve  cities  to  keep  25  per  cent 
of  their  deposits  in  their  vaults  in  greenbacks,  gold  coin  or 
certificates,  or  silver  coin  or  certificates.  Other  national 
banks  must  keep  15  per  cent  reserve.  When  reserves  fall 
below  those  figures,  banks  cannot  add  to  their  loans. 

Legal  Tender.— Ten  kinds  of  money  are  in  circulation  in 
the  United  States.  The  following  are  legal  tender:  Gold 
coin,  standard  silver  dollars,  and  Treasury  notes,  act  of 
July  14,  1890,  for  all  debts,  public  and  private.  United 
States  notes  (greenbacks),  for  all  purposes,  except  duties 
on  imports  and  interest  on  the  public  debt.  Subsidiary 
silver  coin,  in  amounts  not  more  than  $10,  in  one  pay- 
ment. Minor  coins,  to  the  amount  of  25  cents.  The  fol- 
lowing are  not  legal  tender:  Gold  certificates,  silver  cer- 
tificates, and  national  bank  notes ;  but  the  certificates  are 
receivable  for  all  public  dues,  and  national  bank  notes 
are  receivable  for  all  public  dues  except  duties  on  im- 
ports. The  Government  has  the  right  to  pay  out  national 


FINANCIAL  TERMS  AND  PHRASES        189 

bank  notes  for  all  its  debts,  except  interest  on  the  national 
debt  and  except  in  redemption  of  national  currency. 

Long.— To  be  "long"  of  stocks  is  to  have  bought  them  for 
a  rise. 

Manipulation.— The  operations  whereby  stocks  are 
forcibly  raised  or  lowered  in  price,  without  reference  to 
outside  conditions.  The  art  of  manipulation  has  been 
carefully  studied  and  proceeds  with  a  thorough  knowledge 
of  human  nature.  If  the  public  are  to  be  attracted  into 
buying  a  stock,  it  must  be  kept  active.  Operators  usually 
resort  to  matched  orders,  that  is  to  say,  they  order  one 
broker  to  buy  a  certain  number  of  thousand  shares  of  a 
stock  at  a  given  price  and  another  broker  is  ordered  to 
sell  an  equal  quantity.  Another  lot  is  bought  at  a  higher 
price  and  a  similar  lot  sold  at  that  price  or  better,  if 
better  price  can  be  obtained.  The  process,  carried  out 
with  energy,  sends  the  price  of  the  stock  up.  When  a 
stock  is  to  be  depressed  in  price,  similar  tactics  are  re- 
sorted to  on  the  downward  side.  The  exchanges  forbid 
fictitious  sales ;  but  as  these  matched  sales  and  purchases 
are  cleared  regularly  through  the  stock  exchange  clearing 
house,  and  as  a  commission  is  paid  upon  them,  they  form 
a  regular  feature  of  every  campaign  in  stocks  and  cannot 
be  prevented.  The  art  of  manipulation  has  other  fea- 
tures, among  them  the  setting  afloat  of  rumors  calculated 
to  aid  the  result  desired  by  the  operator. 

Margin.— When  a  man  buys  stocks  on  a  " margin"  he 
does  not  pay  the  full  value  for  them,  but  deposits  with 
his  broker  a  certain  percentage  of  the  par  value.  Ten 
per  cent  is  the  usual  margin.  The  stocks  must  be  paid 


190  HOW  MONEY  IS  MADE 

for  in  full,  and  the  broker  does  that  out  of  money  he 
has  borrowed  from  the  banks  on  time  or  call  loans.  In 
the  case  of  wild  and  dangerous  stocks,  the  broker  re- 
quires 20  per  cent  margin.  A  few  active  speculators  ar- 
range to  have  their  stocks  carried  on  a  5  per  cent  margin. 
Whatever  the  margin,  say  10  per  cent,  if  the  stocks  de- 
cline in  value  an  equal  number  of  points,  the  margin  is 
wiped  out.  The  buyer  of  stocks  is  obliged  to  pay  interest 
on  the  amount  of  money  advanced  by  the  broker  upon  the 
purchase.  Upon  short  sales  of  stocks  no  interest  is 
charged,  which  makes  short  sales  a  favorite  with  many 
traders. 

Parity.— Equality  in  value.  If  stocks  sell  in  Boston  at 
the  same  price  as  in  New  York,  they  sell  on  a  parity. 

Point.— A  " point"  in  stocks  is  $1  a  share;  y2  point,  half 
a  dollar  a  share ;  and  so  on. 

Pool.— An  association  of  a  few  individuals  for  operations 
in  the  stock  market.  A  pool  aims  either  to  bull  or  bear 
stocks.  There  is  always  a  manager  of  the  pool,  who  as- 
signs to  each  member  the  amount  of  stock  he  must  carry 
until  the  deal  is  finished,  and  the  part  he  shall  play  in 
the  daily  buying  and  selling  required  for  manipulation 
of  the  stock.  In  order  to  conceal  the  purposes  of  the  pool 
and  its  exact  position,  some  of  its  members  sometimes  sell 
stocks  openly,  while  the  pool  is  really  accumulating,  and 
vice  versa.  A  "blind  pool"  is  one  in  which  the  members 
contribute  the  money  for  its  operations  but  take  no  part 
in  its  operations,  the  manager  alone  knowing  what  is 
being  done  until  the  final  accounting  to  the  members. 

Put.— A  "put"  entitles  the  buyer  thereof  to  "put"  or 


FINANCIAL  TEEMS  AND  PHRASES         191 

deliver  stock  to  its  signer,  within  a  time  and  at  a  price 
named.  The  buyer  pays  a  certain  sum  for  the  privilege. 
A  "put"  is  only  one  form  of  betting  that  a  stock  will, 
or  will  not,  decline  in  value. 

Pyramiding.— When  a  speculator  for  the  rise  has  a  profit 
on  the  stock  already  bought,  he  sometimes  uses  this 
greater  value  of  the  stock  as  a  margin  for  farther  pur- 
chases. The  speculator  for  a  fall  follows  the  same  plan, 
making  his  profits  the  basis  for  additional  sales.  It  is  a 
dangerous  expedient  and  can  be  resorted  to  with  safety 
only  in  the  early  part  of  a  long  swing  in  the  market  either 
way. 

Short.— To  be  short  of  stocks  is  to  have  sold  them  for  a 
fall.  The  trader  is  out  of  all  long  stock  and  then  "goes 
short. ' '  He  orders  the  sale  of  a  certain  number  of  shares ; 
the  broker  sells  them  at  ruling  prices.  The  broker  must 
deliver  the  shares  thus  sold,  and  he  borrows  them  from 
some  other  house  and  pays  for  them  in  full.  When  the 
short  sales  are  covered,  the  stock  then  bought  is  delivered 
to  the  house  from  which  the  original  lot  was  borrowed. 
As  the  broker  who  loans  stock  and  receives  pay  for  it  in 
cash  can  then  loan  out  the  money  so  received  at  interest, 
he  usually  pays  interest  to  the  borrowing  broker.  When, 
however,  the  short  interest  in  the  market  is  large,  he  does 
not  pay  interest,  or  at  any  rate  only  a  nominal  rate. 

Spreads  and  Straddles.— A  "spread"  is  a  double  privi- 
lege, which  entitles  the  holder  either  to  deliver  to-  or  call 
from  the  signer  the  stocks  named  in  the  contract  at  the 
prices  stated.  If  the  price  in  each  case  is  the  same,  the 
privilege  is  a  "straddle." 

Stop  Orders.— The  same  as  "stop  loss  orders."    If  a 


192  HOW  MONEY  IS  MADE 

trader  is  carrying  long  stock,  and  wishes  to  make  sure 
of  some  of  his  profits,  in  the  event  of  an  unexpected  de- 
cline, or  if  the  market  is  going  against  him  and  he  wishes 
to  limit  his  loss,  he  gives  the  broker  a  "stop  order."  If 
he  has  bought  stock  at  100  and  it  has  risen  to  110,  he 
might  say  "sell  at  105,  stop."  Then  if  the  stock  falls 
to  105,  it  is  sold  at  once  and  the  owner  has  at  any  rate 
made  five  points  on  his  purchase.  If  he  has  bought  at 
100  and  the  stock  does  not  go  up,  he  might  order  the 
broker  to  "sell  at  98  stop."  His  loss  would  be  limited 
to  two  points.  Stop  orders  are  used  conversely  by  those 
who  sell  short. 

Surplus  Reserve.—- The  amount  of  reserve  in  lawful 
money  of  the  associated  banks,  or  of  a  single  bank,  in 
excess  of  the  25  per  cent  required  by  law.  If  surplus 
reserve  is  large,  the  loaning  power  of  the  banks  is  equally 
so.  If  surplus  reserve  disappears,  and  especially  if  it  is 
replaced  by  a  deficit,  the  loaning  power  of  the  banks  is 
exhausted.  In  the  latter  case,  the  banks  are  obliged  to 
call  in  and  reduce  their  loans. 

Technical  Conditions.— A  rally  in  the  market  is  some- 
times enginered  on  "technical  conditions,"  which  would 
mean  that  the  market  was  oversold,  i.  e.,  the  short  interest 
was  unduly  large.  A  decline  may  take  place  on  a  dif- 
ferent set  of  technical  conditions,  the  market  being  over- 
bought, that  is  to  say,  all  the  brokerage  houses  loaded 
with  long  stock  and  no  short  interest  in  the  market. 

Washed  Sales.— Practically  the  same  as  "matched  or- 
ders." 

Wild  Cat  Stocks.— Virtually  the  same  as  the  "cats  and 
dogs,"  the  "pups,"  etc. 


RANGE  OF  LEADING  STOCKS  193 

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INTEREST  BATES  AND  SUEPLUS  DEPOSITS 

THE  rates  of  interest  on  call  loans,  and  on  time  loans 
for  four  months  or  more,  and  the  surplus  deposits  of  the 
Clearing  House  banks,  in  New  York  city,  since  1890  in- 
clusive, are  presented  in  following  tables.  Surplus  de- 
posits are  given  in  round  numbers.  They  are  the  excess 
of  deposits  over  loans;  and  when  deposits  are  less  than 
loans,  the  fact  is  indicated  by  a  minus  sign. 

1890 

SURPLUS  deposits  had  been  ample  for  two  years  and  call  loans 
moderate,  except  in  the  crop  season  of  1889.  In  1900,  loans 
passed  deposits  in  the  latter  part  of  the  year;  and,  in  conse- 
quence, after  the  January  rise,  stocks  trended  downward.  Money 
was  high,  loans  went  to  prohibitive  rates,  and  troubles  in  Buenoa 
Ayres  and  the  Baring  failure  caused  a  panie. 

1891 

THE  banking  situation  was  improved  by  the  liquidation.  A 
money  flurry  in  the  Fall  led  to  a  break  in  stocks;  and  then  as 
money  came  back  to  the  banks,  stocks  rose,  ending  the  year  at 
about  the  highest. 

1892 

SURPLUS  deposits  were  large  until  the  Fall.  Then  they  fell  al- 
most to  zero.  Stocks  were  strong  the  first  half  of  the  year,  and 
rose  above  1891.  They  were  weak  and  sagging  during  the  last 
six  months.  The  market  turned  in  1892  for  a  strong  downward 
movement. 

1893 

JANUARY  was  top  of  the  year,  although,  after  a  strong  reaction, 
there  was  a  good  Spring  rise.  The  banking  situation  then  be- 
came strained,  as  eloquently  set  forth  by  the  loss  in  surplus  de- 

210 


INTEKEST  BATES  AND  SURPLUS  DEPOSITS    211 

posits  and  rise  in  interest  rates.  A  great  fall  in  stocks  took 
place  into  July  and  the  market  hung  low  until  the  Fall,  when 
surplus  deposits  began  to  heap  up  and  there  was  a  good  recovery 
in  prices,  amounting  to  about  half  the  loss  since  January. 

1894 

SURPLUS  deposits  were  enormous  in  1894  and  interest  rates  ex- 
tremely low.  A  great  bull  market  might  have  originated  in  1894, 
were  it  not  that  the  Democratic  party  had  gained  control  of  the 
Government  and  eliminated  a  large  amount  of  protection  from 
the  tariff  laws.  This  proceeding  disinclined  the  public  to  mak- 
ing any  new  financial  ventures.  A  bull  movement  could  not 
have  been  supported. 

1895 

SURPLUS  deposits  were  ample  and  interest  rates  moderate  until 
the  last  three  months.  Heavy  buying  of  stocks  for  a  bull  move- 
ment took  place,  and  in  fact  the  market  started  upward.  By 
Fall,  prices  had  risen  above  the  level  of  the  year  before.  The 
improvement  was  checked  in  December  by  the  famous  Venezue- 
lan message  to  Congress,  which  brought  on  a  panic-stricken  de- 
cline into  December,  cancelling  all  the  gains  of  the  year. 

1896 

THERE  was  steady  depletion  of  banking  resources  in  1896  and 
surplus  deposits  fell  below  zero,  while  a  number  of  unfortunate 
influences  prevailed,  dull  times,  the  Bryan  scare  in  politics,  gold 
exports,  and  remarkably  high  rates  of  interest,  etc.  The  election 
of  McKinley  in  November  changed  the  aspect  of  affairs.  Stocks 
were  bought  for  a  bull  market  and  the  country  settled  down  to 
a  new  era  of  prosperity. 

1897 

THE  firm  foundation  for  a  long  bull  market  was  laid  in  1897  by 
a  great  gain  in  surplus  deposits  and  low  interest  rates.  After 
a  good  shake  out  in  April,  stocks  moved  upward  with  a  rush  and 
regained  nearly  all  the  ground  lost  since  1893. 


212  HOW  MONEY  IS  MADE 


1898 

SURPLUS  deposits  were  again  enormous  and  interest  rates  were 
low.  The  War  with  Spain  held  the  market  back  for  a  time;  but 
after  July,  the  swing  was  toward  higher  prices.  December  was 
high  point  of  the  year. 

1899 

STOCKS  rose  steadily,  with  normal  reactions  until  August;  but 
then,  surplus  deposits  were  falling  and  interest  rates  were  ex- 
tremely high,  once  in  December  rising  to  186  per  cent.  British 
defeats  in  South  Africa  and  high  money  led  to  a  strong  break 
in  December;  but  the  times  were  good  and  this  was  only  a  halt 
in  a  bull  market. 

1900 

SURPLUS  deposits  were  well  above  the  danger  line  and  loans  were 
made  at  moderate  rates  of  interest.  Those  long  of  stocks  were 
tired  out  this  year  instead  of  being  shaken  out.  In  the  Fall, 
the  rise  was  resumed  with  energy. 

1901 

A  REMARKABLE  year,  attributed  by  the  astrological  fraternity  to  a 
conjunction  of  Jupiter  with  Saturn,  something  which  happens 
every  thirty  years.  Stocks  boomed.  Surplus  deposits  were  large, 
but  interest  rates  moved  higher,  not  enough,  however,  to  stop 
the  bull  market.  There  were  a  number  of  sudden  breaks  in 
stocks  and  the  May  panic  is  memorable,  but  these  were  due  to 
special  causes  and  not  to  any  danger  in  the  banking  situation. 

1902 

THERE  was  a  great  rise  in  stocks  in  1902,  but  loans  at  the  New 
York  banks  gradually  attained  excessive  proportions;  and  finally, 
at  the  end  of  the  year,  they  were  heavier  than  deposits,  a  state 
of  affairs  which  had  not  existed  since  1896.  Interest  on  call 
loans  was  prohibitive  the  latter  part  of  1902,  and  time  loans 


INTEREST  RATES  AND  SURPLUS  DEPOSITS 

went  above  the  legal  rate.  It  became  imperative  to  reduce  loans 
and  prices  fell  heavily  after  the  great  boom  in  August. 

1903 

THE  banks  were  heavily  loaded  with  loans,  and  surplus  deposits 
were  below  zero  most  of  the  year.  Interest  rates  were  high,  and 
after  a  handsome  January  rise,  stocks  fell  until  August. 

1904 

THE  banks  acquired  cash  heavily  during  1904  and  surplus  deposits 
mounted  enormously.  Call  loans  were  made  at  nominal  rates.  A 
bull  market  was  the  logical  outcome,  and  a  rise  began. 

1905 

SURPLUS  deposits  were  ample,  the  first  half  of  the  year,  and  the 
stock  market  rose  to  the  highest  level  ever  known,  exceeding  1864. 
Money  was  in  good  supply  until  the  latter  part  of  the  year. 

1906 

THE  stock  market  reached  the  highest  level  on  record  in  January, 
1906.  There  were  two  severe  breaks  later.  A  good  rally  succeeded 
into  the  Fall.  The  boom  brought  on  genuine  financial  stringency. 

1907 

LOANS  were  in  excess  of  deposits,  the  entire  year.  On  November 
24th,  they  were  $115,000,000  below  zero,  a  condition  never  before 
known.  There  were  several  spasms  in  money,  in  consequence.  Prices 
fell  steadily,  with  a  rally  now  and  then,  until  November  21st,  when 
40  leading  stocks  were  $52  a  share,  on  the  average,  below  the  top  of 
1906  j  special  stocks  were  down  from  $60  to  $140  a  share. 

1908 

LIQUIDATION  and  the  halt  in  business  corrected  the  strain  on  the 
banks.  Money  piled  up  in  New  York,  and  stocks  rose  until  the  end 
of  the  year. 


214 


HOW  MONEY  IS  MADE 


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INTEREST  RATES  AND  SURPLUS  DEPOSITS    215 


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216 


HOW  MONEY  IS  MADE 


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INDEX 

Account,  182  Boston  &  Maine,  35 

Adjustment  bonds,  182  Bourse,  183 

Allen,  Henry  &  Co.,  97  British  defeats  in  South  Africa, 

Amalgamated  Copper,  121,  179,  97 

193  Broker,  183 

American  Car  &  Foundry,  161,  Brooklyn  Eapid  Transit,  40,  194 

193  Brooklyn  Union  Gas,  195 
American  Locomotive,  161,  193  Bryan  scare  in  politics,  94 
American  Smelting,  48,  121,  193  Bucket  shops,  183 
American  Steel  &  Wire,  97  Buffalo,     Rochester     &     Pitts- 
American    Sugar    Refining,    49,  burgh,  40 

52,  54,  161,  194  Bull  markets,  69,  73,  77,  83,  88, 

Arbitrage,  182  95,  146 

Astor  family,  15  Bulls  on  stocks,  184 
Atchison,    38,    40,    92,    94,    110, 

161,  194  Call,   184 

Atlantic  Bank,  79  Call  loans,  79,  80,  87,  95,  97,  184 

Averaging,  182  Cammack,  Addison,  179 

Campaigns  in  stocks,  143 

Baltimore   &  Ohio,  38,  94,  161,  Canada  Southern,  40 

194  Canadian  Pacific,  161,  195 
Bank  reserves,  100,  129,  188  Capitalization   of  railroads,   31, 
Bank  statements,  130  47 

Baring  failure,  89  Carnegie,  Andrew,  12,  126 

Barker,  Jacob,  63  Cats  and  dogs,  146,  184 

Bear  markets,  62,  68,  71,  75,  76,  Central  Leather,  45 

79,  81,  85,  92,  98,  148  Central  of  Georgia,  36,  38,  39 
Bear  on  stocks,  183  Central  of  New  Jersey,  19,  36, 
Bell,  Louis  V.,  180  40,  81,  114,  161,  195 
Bills  of  exchange,  183  Charts:     Show    course     of    the 
Black  Friday,  78  market,     152;     Southern    Pa- 
Blizzard  of  1888,  159  cific,    150;    ten    stocks    since 
Bonds:  Affected  by  stock  move-  1860,  116 

ments,  112;  junior  issues,  32;  Chesapeake  &  Ohio,  40,  195 

five-year    average,    162;    mar-  Chicago  &  Alton,  36,  196 

ket    prices    since    1890,    40;  Chicago  &  Eastern  Illinois,  38, 

sales   in    1905,    7;    safety    of,  40 

30,   32,   33;   varieties   of,   28;  Chicago  &  Northwestern,  36,  41, 

which  pay  no  interest,  34  79,  196 

233 


234 


INDEX 


Chicago,  Burlington  &  Quincy, 
36,  40 

Chicago,  Milwaukee  &  St.  Paul, 
18,  36,  38,  40,  46,  49,  89,  104, 
114,  158,  161,  173,  196 

Chicago,  Bock  Island  &  Pacific, 
38,  41 

Clearing  House,  184 

Clearing  House  certificates,  72, 
73,  75,  80,  86,  89,  91,  185 

C.,  C.,  C.  &  St.  L.,  41,  104,  114, 
161,  196 

Cleveland,  President,  90,  91,  92, 
93 

Colorado  Fuel,  197 

Colorado  Midland,  36 

Commission,  185 

Community  of  interest,  95,  126 

Competition  and  its  effects,  125 

Consolidated  Gas,  197 

Contango,  185 

Convertible  bonds,  30 

Cooke,  Jay  &  Co.,  30 

Corn  Products,  197 

Corners  in  stocks,  74.  75,  78,  79, 
97,  185 

Course  of  the  market  since 
1860,  104,  114 

Covering,  186 

Coxey's  army,  92 

Credit  Mobilier,  80 

Crimean  War,  68 

Crises  and  depressions,  55,  100 

Crocker,  Charles,  15 

Crops:  Circumstances  of  the 
harvest,  170;  tonnage  of, 
122;  magnitude  of,  66,  77, 
82,  88,  89;  money  required 
for,  111;  reports  of  condi- 
tion, 123,  140;  shortage  of, 
109 

Cycles,  55 


Delaware,  Lackawanna  &  West- 
ern, 36,  41,  44,  104,  114,  198 

Dingley  tariff,  94 

Dividends:  Amount,  monthly, 
106;  on  leading  stocks,  193; 
stock,  84 

Domestic:  Exchange,  186;  trade, 
124 

Double  bottoms,  153 

Double  tops,  153 

Drew,  Daniel,  179 

Dull  days  in  stocks,  154 

Earnings:   Eeports  of,  31,  121; 

their  effect  on  prices,  120;  to 

be  watched,  120 
Equipment  notes,  29 
Erie,  41,  69,  71,  74,  79,  92,  104, 

114  167,  198 

Fall  rise  in  stocks,  107,  175 

Farmers  buying  securities,  8 

Federal  Mining  &  Smelting,  198 

Field,  Jacob,  142,  180 

Field,  Marshall,  11 

Finance  bills,  186 

Financial:    Newspapers,   20,   31, 

121,  124,  125,  141;  terms  and 

phrases,  182 

Five-year  average  price,  161 
Flat,  186 

Flower,  Eoswell  P.,  96 
Foreign  exchange,  186 
Foreign  trade,  60,  62,  63,  64,  67, 

69,  74,  77,  79,  82,  90,  95,  122 
Fortunes  made  in  stocks,  11 
Fort  Wayne,  75 
Fractional  lots,  187 
Franklin  Bank,  63 
Franklin,  Benjamin,  58 
Frick,  Henry  C.,  53 
Future  worth,  51 


Dean,  E.  S.  Co.,  96  Garfield,  President,  84 

Debentures,  29  Gates,  John  W.,  97,  142 

Delaware  &  Hudson,  7,  36,  41,  General  Electric,  149,  199 

73,  75,  104,  114,  149,  161,  197  Gentlemen's  agreement,  89 


INDEX 


235 


Giving  up,  187 

Gold:  Premium  on,  74,  75;  pro- 

duction,  68,  135 
Gould,  Jay,  15,  84,  85,  90,  142, 

177 

Grand  Trunk,  44 
Granger  roads,  187 
Grant  &  Ward,  86 
Grant,  President,  81,  86 
Great  fires:  Boston,  78;  Chicago, 

78,  137;  New  York,  65 

Hamilton,  Alexander,  59 
Harlem  Eailroad,  44,  74 
Hill,  James  J.,  98,  99 
Hocking  Valley,  199 
Holding  the  bag,  188 
Huntineton,  C.  P.,  15 

Illinois  Central,  17,  36,  41,  71, 
104,  114,  161,  199 

Industrial  stocks,  52 

Interest  rates:  And  surplus  de- 
posits,  210;  effect  of  gold  pro- 
duction,  27;  foreign,  23;  in 
early  times,  23,  24;  legal 
rates,  24;  on  bonds,  33;  on 
investments,  21;  on  time 
loans,  26 

International  Paper,  199 

Inter-State  Commerce  Commis- 
sion,  47,  88 

Investors:  Number  of,  9;  how 
they  make  money,  11;  do  they 
run  the  most  risk!  13,  52 

Iron  production  and  prices,  67, 
69,  71,  73,  76,  77,  78,  81,  83, 
86,  93,  125 

Ives,  Henry  S.,  88 

Jackson,  President,  63.  65 
January  rise  in  stocks^  107,  172, 

174,  175 

Jevons,  Prof.  W.  S.,  56 
Johnson,  Prof.  Joseph  F.,  27 
Josephs,  J.  L.  &  S.,  65 


Kaffirs,  188 

Keene,   James  R.,  86,   89,   142, 

144,  178 
Kuhn,  Loeb  &  Co.,  130 

Lake  Shore,  38,   104,  114,  161, 

200 

Lamb,  188 

Lawson,  Thomas  W.,  96,  142,  178 
Legal:  Reserves,  129,  188;  tend- 

ers,  188 

Lehigh  Valley,  44 
Lincoln,  President,  72,  76 
Little,  Jacob,  69 
Long  Island,  41,  44 
Long  of  stocks,  189 

p0?11^  aV\T  b?°ks'  48 
Louisville  &  Nashville,  42,  161, 

200 

McKinley,  President,  94,  97,  129 
McLeod,  A.  A,  91 
Machiavelli,  11 
Mackay,  John  W.,  11 
Madison,  President,  60 
Maine  Central,  36 
Manhattan,  161,  200 
Manipulation,  119,  141,  189 
Margins  on  stocks,  149,  189 
Marine  Bank,  86 
Matched  Orders,  148 
Maxims  of  Wall  Street,  177 
Metropolitan  Bank,  86 
Metropolitan     Street     Bailway, 

127,  200 

Mexican  Central,  38 
Michigan  Central,   36,   74,   104, 

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Michigan  Southern,  71 
Millionaires,  3,  8    ' 
Minneapolis  &  St.  Louis,  38,  42 
Minneapolis,   St.  Paul  &  Sault 

Ste.  Marie,  201 
Missouri,  Kansas  &  Texas,  38, 

201 
Missouri  Pacific,  121,  149,  161, 

201 


236 


INDEX 


Money  stringency,  59,  60,  62,  63, 
65,  70,  72,  75,  76,  79,  89,  91, 
98,  100,  111 

Morgan-Belmont  syndicate,  93 

Morgan,  J.  P.,  11,  89,  130,  180 

Morris  &  Essex,  36 

Morse,  Anthony  W.,  75 

Morus  multicaulis,  64 

National  Biscuit,  161,  203 

National  Cordage,  91 

National  Lead,  201 

National  Tube,  126 

New  York  &  New  England,  92 

New  York  Central,  17,  38,  42, 

78,  87,  104,  114,  127,  161,  202 
New  York,  Chicago  &  St.  Louis, 

42,  80,  161,  202 
New  York  Gas  Light,  7 
New  York  Midland,  80 
New  York,  New  Haven  &  Hart- 
ford, 36,  202 
New  York,  Ontario  &  Western, 

202 
New    York   Produce    Exchange 

Trust  Co.,  97 
New  York  Stock  Exchange,  6,  7, 

18,  155 

New  York  Warehouse  Co.,  80 
Non-dividend-paying  stocks,  45, 

47,85 

Non-interest-paying  bonds,  34 
Norfolk  &  Western,  42,  203 
Normal    yearly    movements    of 

prices,  105,  164,  169 
North  American,  203 
Northern  Pacific,  80,  92,  94,  97, 

167,  203 
Northern  Securities,  99,  158 

Ohio   Life   Insurance    &    Trust 

Co.,  70 

Overend,  Gurney  &  Co.,  76 
Oyama,  143 

Pacific  Mail,  103,  126,  204 
Panama,  103,  126 


Panics,  59,  60,  62,  65,  68,  70,  75, 

78,  79,  86,  89,  91,  93,  97,  99, 

105,  165 
Paper   money:    Contraction,   62, 

76,  115;  inflation,  73,  74,  115 
Parity,  190 

Patience  as  a  factor,  145,  177 
Peabody,  George,  11,  16 
Pennsylvania  Co.,  42 
Pennsylvania   Eailroad,    10,   36, 

38,  44,  161,  204 
People 's  Gas,  149,  204 
Petroleum,  72 
Point  in  stocks,  190 
Points  to  be  watched,  119 
Pool,  190 

Preferred  stocks,  45,  49 
Pressed  Steel  Car,  204 
Pullman,  145,  205 
Puts,  190 
Pyramiding,  191 

Eailroads:  Dawn  of  construc- 
tion, 6;  miles  of  new  line,  64, 
66,  69,  71,  77,  81,  82,  88,  92; 
rate  wars,  81,  85,  86,  126;  re- 
ports of  earnings,  etc.,  121 
Keactions  half-way  back,  162, 

175 

Beading,  42,  44,  45,  46,  48,  49, 
53,  74,  81,  84,  91,  92,  94,  104, 
167,  205 

Beal  estate  speculations,  64 
Beceiverships,  71,  80,  81,  84,  91, 

92,  94,  115 

Bepublic  Iron  &  Steel,  205 
Besumption  of  specie  payments, 

81,  132 

Bich  man 's  panic,  99,  130 
Bichmond  &  Danville,  42 
Bipley,  Edward  P.,  110 
Boberts,  George  H.,  135 
Bockefeller,  John  D.,  12 
Bockefeller,  John  D.,  Jr.,  53 
Bockefeller,  William,  108 
Bock  Island,  41,  205 
Bogers,  Henry  H.,  54,  179 


INDEX 


237 


Borne,    Watertown    &    Ogdens- 

burgh,  43 
Rothschilds,  48,  66,  180 

Safety  in  investments,  30 
St.  Louis  &  San  Francisco,  43 
San  Francisco  earthquake,  137 
Savings  banks:  1820  and  1905, 

8;  investments,  35 
Seligman,  J.  &  W.,  130 
September  break,  111,  112,  163, 

164 

Short  of  stocks,  191 
Silver  Purchase  act,  89,  90,  92, 

155 

Soetbeer,  Dr.  Adolph,  135 
Southern  Pacific,   43,   149,   150, 

162,  206 
Southern  Railway,  38,  43,  149, 

206 

Specie  payments,  61,  65,  72,  81 
Speculation  inevitable,  12 
Spreads  and  straddles,  191 
Spring  rise  in  stocks,  107,  112, 

173,  175 

Standard  Oil,  22,  126,  206 
Stanford,  Leland,  15 
State  of  trade,  124 
Stedman,  Edmund  C.,  6 
Stewart,  A.  T.,  35 
Stocks,  44 

Stop-loss  orders,  175,  191 
Sun  spots,  56 
Supply  of  money,  129 
Surplus:  Deposits,  70,  100,  131, 

144,  166,  173,  210;  reserve,  192 
Swings  of  the  market,  normal, 

105 

Tariff  changes,  62,  64,  66,  67,  69, 
72,  77,  86,  88,  90,  92,  94,  115, 
127 

Taylor,  Moses,  15 
Technical  conditions,  192 
Tennessee  Coal  &  Iron,  162,  207 


Texas  &  Pacific,  38,  43,  207 
Toledo,  St.  Louis  &  Western, 

207 

Trans-Missouri  decision,  96 
Turning  points   in  prices,    100, 

137,  139,   144,  146,   152,   154, 

159 

Undigested  securities,  85,  98 
Union  Pacific,  18,  36,  38,  39,  43, 

49,   53,   87,   92,   94,   120,   126, 

158,  161,  167,  171,  207 
United  Railroads,  36 
United  States  Bank,  4,  5,  59,  60, 

61,  63,  65,  66 

United  States  Leather,  45,  208 
United  States  Rubber,  208 
United  States  Steel,  8,  10,  38, 

43,  49,  52,  120,  122,  142,  145. 

158,  161,  172,  208 

Vanderbilt,  Cornelius,  15,  74,  81, 

142,  180 

Vanderbilt,  William  H.,  85,  88 
Vanderlip,  Frank  A.,  135 
Venezuelan  message,  93 
Villard,  Henry,  86 

Wabash,  43,  209 

War:    With    Mexico,    67  j    with 

Spain,  96 

Washed  sales,  148,  192 
Washington,   city  of,   captured, 

60 

Washington,  George,  3 
Wealth  of  the  United  States,  7 
West  Shore,  87,  127 
Western  Union,  43,  161,  209 
When  to  buy,  50,  160 
When  to  sell,  169 
White,  S.  V.,  91,  178 
Wild  cat  stocks,  192 
Wisconsin  Central,  209 
Woodward  corner,  79 
Workmen  buying  stocks,  8 


David  A.  Boody  Edgar  Boody 

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